Suppose all financial intermediaries in the financial sector have a liquidity ratio of 20%. If a new deposit of $1000 is made, total deposits can increase by:

Question

Quizplus · Accepted Answer

The liquidity ratio of 20% means that financial intermediaries must keep 20% of deposits as reserves and can lend out the remaining 80%. The money multiplier is 1 divided by the liquidity ratio (0.20), which equals 5. Therefore, a new deposit of $1000 can increase total deposits by $1000 x 5 = $5000.

Suppose All Financial Intermediaries in the Financial Sector Have a Liquidity