Suppose the required reserve ratio is 0.20. Total bank deposits are $200 million and the bank holds $50 million in reserves. How much more money could the bank create if it does not hold excess reserves?

Question

Quizplus · Accepted Answer

The bank is required to hold 20% of its deposits as reserves, which amounts to $40 million ($200 million * 0.20). Since it currently holds $50 million in reserves, it has $10 million more than required. This extra $10 million can be used as the base for new loans. Given the reserve ratio of 0.20, the bank can create additional loans up to 5 times the excess reserves (since 1/0.20 = 5), resulting in $50 million ($10 million * 5) of additional money creation.

Suppose the Required Reserve Ratio Is 0