Question

Suppose a banking system has $200 million in deposits, a required reserve ratio of 10 percent, and total bank reserves of $35 million. then the potential increase in deposit creation for the whole banking system is equal to

Answer 1

To find the potential increase, the equation would be the amount of excess reserves (or deposits multiplied by the reserve ratio) multiplied by (100 divided by the required ratio). In this case, that would be (35 - ($200M * 0.10)) * (100/10), or (35M - 20M) * (10). This would leave 15M * 10, or $150 million in potential increase in deposits for the entire banking system.