In a simplified system, a bank receiving a new deposit can extend new loans equal to the amount by which its excess reserves increase.

Question

Quizplus · Accepted Answer

This is known as the money multiplier effect, where banks are able to create new loans based on the increase in their excess reserves. However, in reality, there are other factors that limit the extent to which banks can extend new loans, such as regulatory requirements and the demand from qualified borrowers.

In a Simplified System, a Bank Receiving a New Deposit