After the Reserve Bank increases reserves in the banking system through open-market purchases, banks create new deposits through multiple rounds of lending and accepting deposits, until the:
A)Reserve Bank requires them to stop
B)deposit insurance limit is reached
C)actual reserve-deposit ratio is greater than the desired reserve-deposit ratio
D)actual reserve-deposit ratio is equal to the desired reserve-deposit ratio

Question

Quizplus · Accepted Answer

Banks will continue to create new deposits through multiple rounds of lending and accepting deposits until the actual reserve-deposit ratio is equal to the desired reserve-deposit ratio set by the Reserve Bank. Once this equilibrium is reached, banks will no longer be able to create new deposits.

After the Reserve Bank Increases Reserves in the Banking System