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A single commercial bank must meet a 25 percent reserve requirement. If the bank has no excess reserves initially and $5,000 of cash is deposited in the bank, it can increase its loans by a maximum ofA)$2,000. B) $1,500. C) $1,250. D) $1,000.

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Answer:

$3,750

Explanation:

All four options given are wrong.

Reserve Requirement is the percentage of deposits set by central bank that a commercial bank must hold on hand.  

Calculation

Reserve Requirement = $5,000 X 25% = $5,000 X 0.25 = $1,250

Maximum Loans the bank can give = deposits - Reserve requirement

                                                          = $5,000 - $1,250 = $3,750

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