Required reserve ratio 10 %; bank has required reserves $200 k and excess $50 k. Max system loan increase:

Rationale

$500 k

To determine the maximum system loan increase, we first need to calculate the total reserves available to the bank. With a required reserve ratio of 10%, the bank's total reserves allow it to support additional loans up to a certain limit, which is calculated using the excess reserves.

A ($50 k) YOUR ANSWER

This choice represents the amount of excess reserves the bank has. While excess reserves can contribute to loan creation, they do not reflect the full potential increase in loans based on the reserve requirement. The maximum loan increase is determined by the total reserves relative to the reserve ratio, not just the excess reserves.

B ($500 k) CORRECT

This is the correct answer. The total reserves amount to $200 k (required) + $50 k (excess) = $250 k. With a required reserve ratio of 10%, the bank can lend out 90% of its total reserves. Thus, $250 k / 10% = $2.5 million in total deposits, from which $2.5 million - $2 million (required reserves) = $500 k can be loaned out as excess.

C ($2 m) YOUR ANSWER

This option reflects the total amount of deposits that the bank could theoretically support based on its total reserves but does not indicate the maximum loan increase itself. The $2 million would be the total deposits, while the actual increase in loans that can be extended is limited by the excess reserves available.

D ($5 m) YOUR ANSWER

This choice incorrectly suggests an inflated figure based on the reserve ratio. The calculation shows that the bank can only support a maximum loan increase of $500 k, and this option exceeds that potential. It misrepresents the relationship between reserves and the loans the bank can issue.

Conclusion

The reserve ratio and the bank's reserves dictate the extent of potential loans. By combining the required and excess reserves, we determine that the maximum loan increase the bank can facilitate is $500 k. This understanding underscores the importance of reserve management in banking operations and the capability banks have to extend credit based on their reserves.

Required reserve ratio 10 %; bank has required reserves $200 k and excess $50 k. Max system loan increase:

$500 k

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