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The Gator Nation Bank (GNB) has $600 in deposits. The discount rate is 4%; the Federal funds rate...

Question:

The Gator Nation Bank (GNB) has $600 in deposits. The discount rate is 4%; the Federal funds rate is 5%; and the required reserve ratio is 15%. What is the maximum amount of funds GNB can loan out?

A.$600

B.$576

C.$570

D.$510

Loan Out:

Loan out refers tot he amount which the company is able to give it as a loan and earn interest. The company will charge an interest rate through which it will earn money.

Answer and Explanation:

The required reserve ratio is 15% which implies that the bank holds 15% of its deposit as a reserve rather than lend out. Therefore the bank must keep $15 out of $100 deposit. Thus Bank's total reserve is equal to

{eq}\frac{15}{100}*{600} {/eq}

=90

Therefore bank must keep $90 and maximum (600-90)=$510 dollar can lend out.

Hence the correct answer is

D. $510


Learn more about this topic:

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Loanable Funds: Definition & Theory

from Introduction to Business: Homework Help Resource

Chapter 25 / Lesson 29
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