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22 July, 07:56

After saving money in her piggy bank for three years, Linda decided to deposit $5,000 of the money in the Millertown Bank. Of the bank was fully loaned out prior to the deposit and the required reserve ratio was 20%, then the additional dollar value that Millertown Bank would loan out as a result of Linda's deposit would be

A. $1,000.

B. $4,000.

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  1. 22 July, 08:21
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    The additional amount that could be loaned out because of deposit of Linda is $4000.

    Answer: Option B.

    Explanation:

    Bank can not loan out the entire amount it has with it. Certain amount is to be kept reserved with it for all times. This is known as required reserve ratio which is a particular ratio of the total deposits.

    At the time of being totally loaned out, with twenty percent as the required reserve ratio, the bank can loan out extra amount when Linda deposits money. Since Linda Deposits $5000, twenty percent of this keeping as required reserve ratio, it can loan out $4000 more.
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