Assume the following: a 10 percent required reserve ratio, banks do not hold excess reserves, and the public does not hold cash. Given an initial $500 deposit, what is the maximum amount of new loans and deposits the banking system as a whole can create?

Question

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With a 10% reserve ratio, the money multiplier is 1/0.10 = 10. The initial $500 deposit can lead to a maximum of $500 x 10 = $5,000 in new loans and deposits.

Assume the Following: a 10 Percent Required Reserve Ratio, Banks