Answer:
$380 million
Explanation:
Given that,
Deposits = $120 million
Required reserve ratio = 20 percent
Total bank reserves = $100 million
Required reserve ratio refers to the portion of deposits that is kept with the reserve bank.
Required reserves:
= Deposits × Required reserve ratio
= $120 million × 0.2
= $24 million
Excess reserves:
= Total reserves - Required reserves
= $100 - $24
= $76
So, there is a excess reserves in this economy.
Money multiplier = 1/Required reserve ratio
= 1/0.2
= 5
Therefore, the total money creation potential of this deposit is as follows:
= Excess reserves × Money multiplier
= $76 × 5
= $380 million
Hence, an increase in deposit creation by $380 million.
