Question

A banking system with a reserve ratio of 20% and a change in reserves of $1 million can increase its total demand deposits by:A. $200,000.B. $5 million.C. $1 million.D. $800,000.

Answer 1

Answer: option B is correct

Explanation: In simple words demand deposit is similar to those funds held in a checking account. Demand deposits serves as the base of the money supply of the country.

Demand deposit can be computed using following formula :-

$=\:\frac{demand\:deposit}{required\:reserve\:ratio}$

$=\:\frac{1,000,000}{20\%}=\:\ 5,000,000$