The reserve ratio is 20 percent. The Fed buys $1 million in government securities from a bond dealer by transmitting the funds to the dealer's deposit account at Bank A Bank A loans the maximum amount possible to a construction company, which buys materials from a lumber yard. The lumberyard deposits the construction company's check in Bank B. What is the maximum loan Bank A can now make and the maximum loan Bank B can now make?
A) Bank A: 0; Bank B: $640,000
B) Bank A: 0; Bank B: $800,000
C) Bank A: $800,000; Bank B: $640,000
D) Bank A: $800,000; Bank B: 0
A) Bank A: 0; Bank B: $640,000
Since Bank A already loaned the maximum amount (800,000, since the reserve ratio is 20% and 20% of 1 million is 200,000), they cannot make a loan. Bank B now has the 800,000 but needs to keep 20% (or 160,000, which is 20% of 800,000) and 800,000-160,000= $640,000.
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Answer the following statement true (T) or false (F)