Assuming that banks have loaned all excess reserves, then an increase in checking account balances brought about by an increase in deposits is equal to

Question

Quizplus · Accepted Answer

When banks have loaned out all excess reserves, an increase in deposits will require them to hold additional required reserves in order to maintain the required reserve ratio. This means that the bank can lend out a fraction of the initial deposit, which is equal to (1/reserve ratio). The remaining amount, (1-1/reserve ratio), must be held as required reserves, which means that the increase in checking account balances will be equal to the initial deposit multiplied by (1/reserve ratio). Therefore, the correct answer is B).

Assuming That Banks Have Loaned All Excess Reserves, Then an Increase