If the required reserve ratio is .2 and reserves initially decline by $25, demand deposits can decline by

Question

Quizplus · Accepted Answer

The required reserve ratio is the proportion of demand deposits that a bank must hold as reserves. In this case, the required reserve ratio is 0.2 or 20%. This means that the bank must hold 20% of its demand deposits as reserves.

If the bank's reserves initially decline by $25, it means that the bank's reserves have decreased by 20% * X where X is the initial amount of demand deposits.

Thus,
0.2 * X = $25
X = $125

Therefore, the demand deposits can decline by $125.

If the Required Reserve Ratio Is