Suppose a banking system has $200 million in deposits,a required reserve ratio of 10 percent,and total bank reserves of $35 million.Then the potential increase in deposit creation for the whole banking system is equal to

Question

Quizplus · Accepted Answer

The potential increase in deposit creation for the whole banking system is determined by the money multiplier formula: 
Potential increase in deposits = (1/required reserve ratio) x excess reserves 
Excess reserves = total bank reserves - required reserves 
Required reserves = deposits x required reserve ratio 
In this case, the excess reserves are:
Excess reserves = $35 million - ($200 million x 0.10) = $35 million - $20 million = $15 million 
So, the potential increase in deposits is:
Potential increase = (1/0.10) x $15 million = $150 million

Suppose a Banking System Has $200 Million in Deposits,a Required