How much can the banking system increase deposits, given a required reserve ratio of 20 percent, an initial injection of $1,000 worth of reserves, and no excess reserve or currency drain?

Question

Quizplus · Accepted Answer

The banking system can increase deposits by a maximum of $5,000 given a required reserve ratio of 20 percent and an initial injection of $1,000 worth of reserves. This is calculated using the money multiplier formula, which is 1/required reserve ratio. In this case, 1/0.20 = 5. Therefore, the initial injection of $1,000 can be multiplied by 5, resulting in a maximum increase in deposits of $5,000.

How Much Can the Banking System Increase Deposits, Given a Required