Assume that the required reserve ratio is 20 percent and the commercial banking system initially has no excess reserves. Additional deposits of $40 million into checking accounts will permit the banking system to create a maximum of other new deposits equal to

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The money multiplier is 1 divided by the reserve ratio, which is 1/0.20 = 5. The maximum new deposits that can be created is the initial deposit multiplied by the money multiplier: $40 million * 5 = $200 million. However, this includes the initial deposit, so the additional new deposits are $200 million - $40 million = $160 million.

Assume That the Required Reserve Ratio Is 20 Percent and the Commercial