Suppose, the current reserve ratio is 20% and the current cash-drain is zero. Currently, the banking system has cash reserves of $10 billion. If the banking system reduces its reserve ratio to 10%, while cash-drain remains zero, eventually it will lead to one of the following outcomes:

Question

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When the reserve ratio is reduced from 20% to 10%, banks need to hold less money in reserve for each dollar of deposits. Initially, with a 20% reserve ratio and $10 billion in reserves, the banking system could support $50 billion in deposits ($10 billion / 0.20). Reducing the reserve ratio to 10% means these same reserves can now support $100 billion in deposits ($10 billion / 0.10). The difference between the new possible total deposits ($100 billion) and the original deposits ($50 billion) is $50 billion in new deposits that can be created. Since the banking system initially had exactly enough reserves for its deposits at a 20% reserve ratio, reducing the ratio to 10% effectively makes half of the reserves ($5 billion) excess, as they are no longer needed to back new deposits.

Suppose, the Current Reserve Ratio Is 20% and the Current