Suppose a banking system has $120 million in deposits,a required reserve ratio of 20 percent,and total bank reserves for the whole system of $100 million.Then the potential increase in deposit creation for the whole system is equal to

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Quizplus · Accepted Answer

The potential increase in deposit creation for the whole system is calculated using the money multiplier formula, which is 1/required reserve ratio. In this case, the money multiplier is 1/0.2=5. Therefore, the potential increase in deposits is equal to the total bank reserves multiplied by the money multiplier, or $100 million x 5 = $500 million. However, since the banking system only has $120 million in deposits, the actual increase in deposits that can be created is limited to $500 million - $120 million = $380 million.

Suppose a Banking System Has $120 Million in Deposits,a Required