If the reserve requirement is 2.5% and a bank initially receives $30,000 in deposits from the Fed, then the maximum amount of money that the banking system can create is
A) $750.
B) $1,500.
C) $30,000.
D) $1,200,000.

Question

Quizplus · Accepted Answer

The reserve requirement of 2.5% means that the bank must keep 2.5% of the $30,000 deposit, which is $750, as reserves. The remaining $29,250 can be loaned out. This loan will become a deposit in another bank, and that bank will keep 2.5% of the deposit as reserves and loan out the rest. This process continues, and the total amount of money that can be created is the initial deposit divided by the reserve ratio:

$30,000 / 0.025 = $1,200,000.

Therefore, the maximum amount of money that the banking system can create is $1,200,000.

If the Reserve Requirement Is 2