Gov’t deficit ↑ â†' loanable funds market: demand ↑ and real rate:
$500 k
The maximum increase in loans that the banking system can provide is determined by the excess reserves multiplied by the reserve requirement ratio. With $50,000 in excess reserves and a required reserve ratio of 10%, the total potential increase in loans is calculated using the money multiplier effect.
This choice represents only the amount of excess reserves the bank currently has. While these reserves can support additional loans, it does not account for the ability of the banking system to expand loans further through the multiplier effect, which allows for a greater total impact on the money supply.
This is the correct choice because the maximum increase in loans is calculated by taking the excess reserves of $50,000 and dividing it by the reserve requirement ratio (0.10). Thus, $50,000 / 0.10 results in $500,000. This reflects the total potential loans the bank can create through the lending process.
This figure exceeds the potential increase in loans based on the current excess reserves and required reserve ratio. To achieve a $2 million increase, the bank would need significantly more excess reserves or a lower required reserve ratio, neither of which is present in this scenario.
Similar to choice C, this amount is unattainable given the existing excess reserves of $50,000 and the 10% reserve requirement. To support a $5 million increase in loans, the bank would require a much larger base of excess reserves, which is not provided in this situation.
The maximum increase in loans that can be generated from the current excess reserves is determined by the reserve requirement ratio. With $50,000 in excess reserves and a 10% required reserve ratio, the banking system can potentially create an additional $500,000 in loans. Understanding this relationship is crucial for grasping how banking systems influence the money supply through lending activities.
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