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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 loan this bank can extend?
Correct Answer: C
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.