Suppose the required reserve ratio is 10 percent and the public decides to deposit $50 million cash into checking accounts throughout the banking system. This will allow the banking system to create a maximum amount of additional new deposits equal to
A) $40 million
B) $50 million
C) $450 million
D) $500 million

Question

Quizplus · Accepted Answer

The banking system can create additional deposits through the money multiplier effect. The money multiplier is the reciprocal of the required reserve ratio, which in this case is 1/0.10 = 10. Therefore, the maximum amount of additional new deposits that can be created is $50 million * 10 = $500 million. However, since the initial $50 million is part of the new deposits created, the additional amount over the initial deposit is $500 million - $50 million = $450 million.

Suppose the Required Reserve Ratio Is 10 Percent and the Public