Question

If the required reserve ratio is 0.08, a bank can lend out:
A) 8 percent of its deposits.
B) 8 percent of its reserves
C) 92 percent of its deposits.
D) 92 percent of its reserves.

Answer 1

Answer:

C) 92 percent of its deposits.

Explanation:

Since, the reserve ratio represents the portion of deposit that a commercial bank must hold onto, rather than lend out or invest.

i.e. if reserve ratio = a%,

Then the percentage of amount that bank can land out = (100-a)%,

Here,

Reserve ratio = 0.08 = 8%,

Thus, the percentage of amount that bank can land out = (100-8)% = 92%.

i.e. bank can land 92 percent of its deposits.