The bank can lend an additional $1,000.
When Andy deposited $1,200 of cash, the bank first had to set aside 25%, or $300, in reserves. This leaves the bank with $200 of excess reserves. The bank then lent Molly $400. This leaves the bank with $800 of excess reserves. Since the reserve ratio is 25%, the bank can lend an additional $800/.25 = $1,000.
Reserve requirements are the number of funds that a bank must hold in reserve and not lend out. These are set by a central bank or other regulating body, and the amount is based on the number of customer deposits a bank holds. The purpose of reserve requirements is to ensure that banks have sufficient funds to cover potential losses from loan defaults and other liabilities.
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