Suppose Ariana deposits $75,000 in her bank. If the reserve ratio is 20 percent, this will lead to a maximum increase of ________ in checking account balances throughout all banks.

Question

Quizplus · Accepted Answer

The reserve ratio is 20%, meaning that the bank has to hold onto 20% of Ariana's $75,000 deposit as reserves, leaving $60,000 available for lending. Using the money multiplier formula (1/reserve ratio), we can calculate the maximum increase in checking account balances:

1/0.20 = 5

$60,000 x 5 = $300,000

Therefore, the maximum increase in checking account balances throughout all banks is $300,000.

Suppose Ariana Deposits $75,000 in Her Bank