Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of

Question

Quizplus · Accepted Answer

With a reserve ratio of 20 percent, Bank A is required to hold 20% of $100,000 which is $20,000 as reserves. This leaves Bank A with $80,000 in excess reserves. Using the money multiplier formula (1/reserve ratio), we can calculate the maximum potential increase in the money supply as follows:
1/0.2 = 5
$80,000 x 5 = $400,000
Therefore, Bank A can increase the money supply by a maximum of $400,000, but since they already have the initial deposit of $100,000, the actual maximum increase is $80,000.

Assume Company X Deposits $100,000 in Cash in Commercial Bank