Suppose that the banking system currently has no excess reserves and that a bank receives a deposit into a checking account of $10,000 in currency.If the required reserve ratio is 0.20,what is the maximum amount that the banking system can lend out?

Question

Quizplus · Accepted Answer

When a bank receives a deposit of $10,000 and the required reserve ratio is 0.20 (or 20%), the bank must keep $2,000 (20% of $10,000) as reserves and can lend out the remaining $8,000. However, the question asks about the maximum amount the banking system can lend out, not just this single bank. The $8,000 lent out can be deposited into another bank, which then keeps 20% in reserves ($1,600) and lends out the rest ($6,400), and this process continues. The formula to calculate the maximum total lending capacity of the banking system is the initial deposit divided by the reserve requirement: $10,000 / 0.20 = $50,000. However, since the initial $10,000 is part of the deposits and not lent out, the maximum amount that can be lent out by the banking system is $50,000 - $10,000 = $40,000.

Suppose That the Banking System Currently Has No Excess Reserves