Suppose a bank operates in a country with a 10 percent reserve requirement, and someone deposits $5,000 into a savings account. Including the deposit, how much money has been created in this economy?

Question

Quizplus · Accepted Answer

With a 10 percent reserve requirement, the bank is required to keep 10 percent of the deposit, or $500, as reserves and can lend out the remaining $4,500. This $4,500 is then deposited into another account, and the bank is again required to keep 10 percent, or $450, and lend out the remaining $4,050. This process continues, with each deposit creating new loans and new deposits. Using the formula for the money multiplier, we can calculate that the total amount of money created is $50,000.

Money created = (1 / reserve requirement) x initial deposit
= (1 / 0.1) x $5,000
= $50,000

Suppose a Bank Operates in a Country with a 10