Suppose that the banking system currency has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency. If the required reserve ratio is 0.20, what is the maximum amount that the banking system can lend out?

Question

Quizplus · Accepted Answer

The required reserve ratio is 0.20, meaning the bank must keep 20% of the deposit as reserves. For a $10,000 deposit, the bank must keep $2,000 in reserves and can lend out $8,000. This $8,000 can be redeposited and re-lent, creating a money multiplier effect. The money multiplier is 1/0.20 = 5. Thus, the maximum amount that can be lent out is $8,000 * 5 = $40,000.

Suppose That the Banking System Currency Has No Excess Reserves