Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

Question

Quizplus · Accepted Answer

With a required reserve ratio of 10 percent, Odyssey National must keep $100 of the $1,000 deposit in reserve but can lend out $900. The $900 can then be deposited in another bank, which can lend out 90% of that, and so on. This process continues, creating a multiplier effect. The total increase in the money supply, excluding the initial $1,000 deposit, is calculated using the money multiplier formula (1/reserve ratio), which in this case is 1/0.1 = 10. Thus, the banking system can increase the money supply by $1,000 * 9 = $9,000, excluding the initial deposit.

Imagine That Odyssey National Is a Brand New Bank, and That