Bank North's Balance Sheet Assets Liabilities
Reserves $300 Deposits $2000
Loans $2200 Capital $500
$2500 $2500
TABLE 26-2
Refer to Table 26-2.Assume that Bank North is operating at its target reserve ratio and has no excess reserves,and that all commercial banks have the same target reserve ratio.If a new deposit to the Canadian banking system of $400 is deposited at Bank North,the total new deposits created in the banking system can be calculated as follows:

Question

Quizplus · Accepted Answer

If Bank North is operating at its target reserve ratio and has no excess reserves, it means that its reserves equal 15% of its deposits ($300/$2000 = 0.15). Therefore, when a new deposit of $400 is made, Bank North can lend out $340 (0.85 of the deposit). This new loan becomes a new deposit in another bank, which can lend out 0.85 of that deposit, and so on. Using the money multiplier formula (1/reserve ratio), we can calculate the total new deposits created in the banking system:
$400/(0.15) = $2666.67. Therefore, the best choice is B.