Question

If a commercial banking system has $200,000 in checkable deposits, actual reserves of $70,000, and a reserve ratio of 20 percent, then the banking system can expand the supply of money by a maximum of $180,000.
A. True
B. False

Answer 1

Answer:

B. False

Explanation:

The banking system can expand the supply of money by a maximum of $1,000,000 ($200,000/0.2).

The maximum currency creation by the banking system is a function of the checkable deposits and the reserve ratio.  The formula for this is called the money multiplier, and is given as the checkable deposits divided by the reserve ratio.  With this multiplier factor, banks can increase the currency in circulation.  This is why central banks use the reserve ratio to monitor the supply of money in their economies.