The following is information about a banking system: New currency deposited in the system = $40 billion; desired reserve ratio = 20%;
Excess reserves prior to the currency deposit = $0.Refer to the above information.The $40 billion deposit of currency into chequing accounts will create excess reserves of:
A)$20 billion.
B)$32 billion.
C)$40 billion.
D)$0.

Question

Quizplus · Accepted Answer

The desired reserve ratio is 20%, therefore the bank must hold $8 billion (20% of $40 billion) in reserves. With excess reserves prior to the deposit being $0, the maximum amount the bank can lend out is $32 billion ($40 billion deposit - $8 billion reserve). Therefore, the excess reserves created by the deposit will be $32 billion.

The Following Is Information About a Banking System: New Currency