Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve. If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking
System will be

Question

Quizplus · Accepted Answer

When people cash out $10 billion, banks lose these funds from their reserves. With a reserve ratio of 20%, banks must hold 20% of deposits as reserves. Therefore, for every dollar of reserves, banks can lend out $5 (1/0.20). Losing $10 billion in reserves means the banking system can lend out $50 billion less. However, since the initial $10 billion is part of this amount, the net decrease in lending ability is $40 billion.

Assume That the Reserve Ratio Is 20 Percent and Banks