Question

If a customer deposits $10,000 into a bank, how much money would the bank be capable of lending to an eligible loan applicant if this bank retains 20 percent of the deposit to cover withdrawals?

Answer 1

$8,000

Explanation:

Let's first talk about banks. While many people believe that banks are in the business of taking customer deposits and pay interest to us for those deposits, nothing could be further from the truth. They do provide this service, but it's so that they can have money to loan out to customers and collect interest from them.

A bank wants to hold onto as little capital as it needs to in order to be able to loan out more money.

In our question, a deposit of $10,000 has been made. The bank will retain 20%, or `10,000xx20%=2,000` and will therefore be able to loan out $8,000.