Question

Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $30,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by the maximum amount of__________.

Answer 1

Answer:

$20,000

Explanation:

For computing the supply of money expanded, first, we have to determine the excess reserve which is shown below:

= Actual reserves - required reserves

= $30,000 - $100,000 × 25%

= $30,000 - $25,000

= $5,000

Now the supply of money expanded would be

= Excess reserves ÷ reserve ratio

= $5,000 ÷ 25%

= $20,000

So, the maximum amount would be $20,000