Question

A banking system has a reserve ratio equal to 15%. For every $100 deposited into the banking system, the bank is required to keep 2 at least ____________ on reserve and can therefore lend no more than _________ Instructions: Enter a whole number in each box above.
b. For this banking system, the money multiplier is equal to__________meaning that $100 of cash deposited into the banking system 4 points can be turned into ___________ deposits through the money creation process.

Answer 1

Answer:

A banking system has a reserve ratio equal to 15%. For every $100 deposited into the banking system, the bank is required to keep 2 at least ____$15________ on reserve and can therefore lend no more than ___$85______ Instructions: Enter a whole number in each box above.

b. For this banking system, the money multiplier is equal to_____6.67_____meaning that $100 of cash deposited into the banking system 4 points can be turned into ___$667________ deposits through the money creation process.

Explanation:

a) Reserve Ratio:  This is the portion of deposit liabilities that commercial banks must keep, rather than lend out or invest as determined by the country's central bank.   In the United States, the Federal Reserve determines the Reserve Ratio and uses it to control the money supply in the economy.

b) The Money Multiplier refers to the change that happens when an initial deposit leads to a bigger final increase in the total money supply.   For example, a commercial bank has deposit liability of $1 million and this leads to a final money supply of $10 million. The money multiplier is 10.  The formula for calculating the money multiplier is 1/RR, where RR is the Reserve Ratio.  This means that the money multiplier is a function of the reserve ratio.