A banking system has total deposits of $500 billion and total reserves of $130 billion. If the reserve requirement is 20%, what is the maximum possible deposit creation potential of the banking system?
A) $150 billion
B) $130 billion
C) $500 billion
D) $30 billion

Question

Quizplus · Accepted Answer

The maximum possible deposit creation potential is calculated by subtracting the required reserves from the actual reserves and then using the money multiplier. Required reserves for $500 billion at 20% are $100 billion ($500 billion * 20%). The actual reserves are $130 billion, so the excess reserves are $30 billion ($130 billion - $100 billion). The money multiplier is 1/reserve requirement = 1/0.20 = 5. Therefore, the maximum possible deposit creation is $30 billion * 5 = $150 billion.

A Banking System Has Total Deposits of $500 Billion and Total