Question

Suppose that the required reserve ratio is 20 percent for commercial banks and there are currently no excess reserves. Then, one bank in the bank system receives a cash deposit of $250,000 for a checking account. What is the maximum amount of money that will be created in the banking system as a result of that that deposit?

Answer 1

Answer:

The amount of money created will be $1,250,000

Explanation:

In order to find the maximum amount of money that will be created in the banking system as a result of a deposit, we need to find the money multiplier.

Multiplier = 1/reserve ration = 1/0.2 = 5

The amount of money created = Multiplier *Initial deposit

Amount of money created = 5* 250,000

= 1,250,000