If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 20 percent, the maximum amount of deposits the banking system can support is

Question

Quizplus · Accepted Answer

The reserve ratio is the percentage of deposits that banks are required to hold in cash reserves. If the target reserve ratio is 20 percent, this means that banks can lend out 80 percent of their deposits. Therefore, the total amount of deposits that the banking system can support is $20 million / 0.2 = $100 million. Option D is the closest choice to this amount.

If All the Banks in the Banking System Collectively Have