Suppose a bank does NOT hold excess reserves and the reserve ratio is 20%. If Molly deposits $1,000 of cash in her checking account and the bank lends $600 to Freda, the bank can lend an additional:

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If Molly deposits $1,000 cash, the bank must hold $200 in reserves (20% reserve ratio). The bank then lends out $600 to Freda, reducing its reserves by $600 to $400. Since the reserve ratio is 20%, the bank can lend out an additional 20% of the $400 in excess reserves, which is $80. Therefore, the bank can lend an additional $80, bringing the total amount of loans to $600+$80=$680. So, the bank can lend an additional $80.

Suppose a Bank Does NOT Hold Excess Reserves and the Reserve