Suppose that initially a bank has excess reserves of $800 and the reserve ratio is 30%. Then Andy deposits $1,000 of cash into his checking account and the bank lends $600 to Molly. That bank can lend an additional:

A) $100.

B) $800.

C) $900.

D) $300

excess reserves after lending = $900

so correct option is C) $900

Explanation:

given data

reserves = $800

reserve ratio = 30%

deposits = $1,000

bank lends = $600

to find out

That bank can lend an additional

solution

first we get required reserves from new deposit that is express as

required reserves = deposit * reserve ratio ... 1

put here value

required reserves = $1000 * 30%

required reserves = $300

and

now excess reserves from new deposits will be

excess reserves = deposits - required reserves ... 2

put here value

excess reserves = $1000 - $300

excess reserves = $700

and

total excess reserves will be here

total excess reserves = old excess reserves + new excess reserves ... 3

put here value

total excess reserves = $800 + $700

total excess reserves = $1500

so that

excess reserves after lending is here express as

excess reserves after lending = excess reserves - amount given to Molly ... 4

put here value

excess reserves after lending = $1500 - $600

excess reserves after lending = $900

so correct option is C) $900