Only one commercial bank in the banking system has any excess reserves, and its excess reserves are $400,000. This bank makes a new loan of $300,000 and keeps excess reserves of $100,000. If the required reserve ratio for
All banks is 12.5 percent, the potential expansion of the money supply from this new loan is

Question

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The required reserve ratio is 12.5%, meaning that the bank must hold 12.5% of the $300,000 loan, or $37,500, in reserves. Since the bank has $100,000 in excess reserves, it can loan out the full $300,000. This new loan becomes a new deposit in another bank, which will then be able to loan out 87.5% of that deposit, or $262,500. This process will continue as each new loan becomes a new deposit, leading to a potential expansion of the money supply of $2.4 million ($300,000/0.125).

Only One Commercial Bank in the Banking System Has Any