Suppose the required reserve ratio is 0.15. Total bank deposits are $100 million and the bank holds $20 million in reserves. How much more money can the bank create if it does not hold excess reserves?

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Quizplus · Accepted Answer

The bank can create additional money based on the excess reserves it holds. The excess reserves can be calculated as the actual reserves minus the required reserves. Required reserves = 0.15 * $100 million = $15 million. The bank has $20 million in reserves, so the excess reserves are $20 million - $15 million = $5 million. The money multiplier is 1 / reserve ratio = 1 / 0.15 = 6.67. Therefore, the bank can create additional money = excess reserves * money multiplier = $5 million * 6.67 = $33.35 million, which is approximately $33 million.

Suppose the Required Reserve Ratio Is 0