A commercial bank has no excess reserves until a depositor places $2,000 in cash in the bank. The reserve ratio is 10 percent. The bank then lends $1,500 to a borrower. As a consequence of these transactions, the bank's excess reserves are

A. not affected.

B. increased by $200.

C. increased by $300.

D. increased by $500.

Option (C) is correct.

Explanation:

Based on given information, the bank's excess reserves occurs when $2,000 is deposited in the bank as a form of cash.

The reserve ratio = 10%

= 0.1

Bank's reserve = Deposit amount * Reserve ratio

= $2000 * 0.1

= $200

Bank lends to a borrower = $1500

So, bank's excess reserve:

= Deposit amount - Bank's reserve - Bank's lending amount

= $2,000 - $200 - $1,500

= $300

Therefore, as a consequence of these transactions, the bank's excess reserves are increased by $300.