The banking system can increase the volume of loans by a maximum of $50,000
<h3><u>What are total reserves?</u></h3>
- A bank's reserves are calculated by multiplying its total deposits by the reserve ratio. For example, if a bank's deposits total $500 million, and the required reserve is 10%, multiply 500 by 0.10. The bank's required minimum reserve is $50 million.
<h3><u>Calculation of total reserves</u></h3>
- The reserve ratio is the portion of reservable liabilities that commercial banks must hold onto, rather than lend out or invest. This is a requirement determined by the country's central bank, which in the United States is the Federal Reserve. It is also known as the cash reserve ratio.
Total Reserves = Cash in vault + Deposits at Fed.
Required Reserves = RR x Liabilities.
Excess Reserves = Total Reserves - Required Reserves.
Change in Money Supply = initial Excess Reserves x Money Multiplier.
Money Multiplier = 1 / RR.
Therefore banking systems can increase the volume of loans by $50,000
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