The bank will be free to lend $6440 when the reserve rate is 8% and the deposits received by the bank are $7000.
What are reserve rates?
We know that banks take deposits and lend money. But to maintain the liquidity, the bank can not lend all the money it gets as a deposit. It has to keep some money from the deposits as reserves. This reserve is determined by the reserve rate set by the central bank of the country.
How do we solve the given question?
We are given that the reserve rate is 8%. A bank receives a deposit of $7000. We are asked the amount the bank will be able to lend.
Bank's reserves = 8% of deposits = 8% of $7000 = $0.08*7000 = $560.
∴ The amount the bank will be able to lend = Deposits - Reserves = $7000 - $560 = $6440.
∴ The bank will be free to lend $6440 when the reserve rate is 8% and the deposits received by the bank are $7000.
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