$$\begin{array} { | c | c | c | }
\hline \text { (1) } & ( 2 ) & ( 3 ) \
\hline \text { Legal Reserve Ratio (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } \
\hline 10 & \$ 40,000 & \$ 10,000 \
\hline 20 & 40,000 & 10,000 \
\hline 25 & 40,000 & 10,000 \
\hline 30 & 40,000 & 10,000 \
\hline
\end{array}$$ The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 20 percent, the money-creating potential of the entire banking system is
A) $4,000.
B) $6,000.
C) $8,000.
D) $10,000.

Question

$$\begin{array} { | c | c | c | } 
\hline \text { (1) } & ( 2 ) & ( 3 ) \
\hline \text { Legal Reserve Ratio (\%) } & \text { Checkable Deposits } & \text { Actual Reserves } \
\hline 10 & \$ 40,000 & \$ 10,000 \
\hline 20 & 40,000 & 10,000 \
\hline 25 & 40,000 & 10,000 \
\hline 30 & 40,000 & 10,000 \
\hline
\end{array}$$ The accompanying table gives data for a commercial bank or thrift. When the legal reserve ratio is 20 percent, the money-creating potential of the entire banking system is
A) $4,000.
B) $6,000.
C) $8,000.
D) $10,000.

Quizplus · Accepted Answer

When the legal reserve ratio is 20 percent, the bank is required to keep 20% of its checkable deposits as reserves. Therefore, in this case, the required reserves would be 20% of $40,000, or $8,000. Since the bank has $10,000 in actual reserves, it has excess reserves of $2,000 ($10,000 - $8,000). These excess reserves can be used to create new loans and deposits, which in turn can create more excess reserves and lead to further expansion of the money supply. The maximum potential expansion of the money supply is determined by the reciprocal of the reserve ratio (1/0.20 = 5), multiplied by the excess reserves ($2,000 x 5 = $10,000). Therefore, the money-creating potential of the entire banking system is $10,000.

The Accompanying Table Gives Data for a Commercial Bank or \hline

The Accompanying Table Gives Data for a Commercial Bank or
\hline