CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

If BJSH Bank is required to maintain a 20 percent reserve by its central bank, and currently it has excess reserves of $500,000, what is the maximum amount of a loan this bank can extend?
A. $400,000
B. $500,000
C. $2,500,000
Explanation: The BJSH Bank can lend out all its excess reserves of $500,000 initially. If borrowers deposit the money BJSH Bank lends out with BJSH again, BJSH can continue to keep the 20% as required reserve and lend out the rest. This process could potential "create" a total of $2,500,000 in money supply.

User Contributed Comments 11

User Comment
jmcarr02 Should we assume there's no rival bank ? Ah ah..!
anitta jmcarr02: The question asks how much this bank can lend. Assumung that all subsequent deposits would come to this bank is unrealistic.
myanmar multiplier is equal 1/0,2 = 5 --> 500,000*5=2,500,000
akanimo explaination pushes the boundaries or reality. What would be more plausible would be to say that the ACTUAL RESERVE would be at least EQUIVALENT OR MORE than the excess and be $500,000 .... which means the "non-reserve" portion would at a minimum = $500,000 * 100%/(100% - "0%) ... which would give $2,000,000 ... when added to the excess $500,000 the total loanable amount would be $2,500,000. This is a bit "wobbly" but sure beats the explaination given!
sunny akanim: the question asks for maximum so we do want to know the boundary.
Tomcat82 With no more information given, I would say that all they can lend out would be their excess reserves and all the money kept coming back to the same bank.
omya Excess Reserves creates deposits, banks keep reserves based on the required reserves %. so in this case bank can create 5$ of deposits on 1$ of reserves as the reserve rate is 1/5th of the reserves held.
oneashok AnalystNotes should consider Like buttons for each comment or vote up/down buttons... Wait a min are you searching for Like button below my comment?
jnptrsn1 This question really should differentiate between how much it can lend out in the immedate and longer terms.
houstcarr Answer is B. Since the bank only has an excess of $500k, and the question is asking the maximum amount of "a" loan it can extend (as in a single loan), not sure how you you can say it can make a $2.5mm loan.
ocionesw Analystnotes should say that 'what is the maximum additional to money supply' and not maximum of loan a bank can extend. Beyond $500,000 the money is created from other banks and not to this bank.
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