Question

Suppose the entire banking system has $50 million in excess reserves and a required reserve ratio of 10 percent. The deposit-creation potential of the banking system is:

Answer 1

Answer: $500 million

Explanation:

The required reserve ratio is the fraction of the total deposit that a bank recieves which is mandated by the central bank to be kept and should not be given out.

If the entire banking system has $50 million in excess reserves and a required reserve ratio of 10 percent. The deposit-creation potential of the banking system will be:

= $50million/10%

= $50million/0.1

= $500 million