Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve.If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be

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When people cash out $10 billion from their checking accounts, the banks lose $10 billion in deposits. Since the reserve ratio is 20%, the banks must hold $2 billion in reserves, which means they can only lend out $8 billion of the $10 billion they lost. This means that the lending ability of the banking system will be decreased by $10 billion - $8 billion = $2 billion. However, since banks are loaning out all their excess reserves, the decrease in lending ability will be multiplied by the money multiplier, which is 1 / (reserve ratio) = 1 / 0.2 = 5. Therefore, the lending ability of the banking system will be decreased by $2 billion * 5 = $10 billion.

Assume That the Reserve Ratio Is 20 Percent and Banks