Assume that the required reserve ratio is 10%. An increase of $1,000 in the banking system's excess reserves may result in a total expansion of new deposits for the banking system as a whole by as much as
A) $1,000.
B) $9,000.
C) $10,000.
D) $100,000.

Question

Quizplus · Accepted Answer

When the banking system receives an additional $1,000 in excess reserves, it can lend out 90% of that amount, which would result in $900 of new loans being created. These loans would then circulate in the economy and deposit into other bank accounts, allowing for further lending and deposit creation. This process can continue until the total expansion in new deposits reaches $10,000, which is the maximum potential increase allowed by the 10% reserve requirement. Thus, the correct answer is C, $10,000.

Assume That the Required Reserve Ratio Is 10