Suppose the required reserve ratio is 20%. A $5 million deposit allows commercial banks to create a maximum total of _______ in deposits.

Question

Quizplus · Accepted Answer

With a 20% reserve ratio, banks must keep $1 for every $5 deposited. Thus, they can lend out $4 for every $5 deposited. The money multiplier is 1/0.2 = 5. Therefore, a $5 million deposit can create up to $25 million in total deposits.

Suppose the Required Reserve Ratio Is 20