The banking system has £200 million in total deposits. Banks are initially required by the central bank to operate a liquidity ratio of 20%. Assume now that the central bank wants to increase deposits in the banking system to £400 million. Assuming also that there are no leakages from the banking system, the central bank could achieve this by

Question

Quizplus · Accepted Answer

Reducing the liquidity ratio to 10% allows banks to lend out more of their deposits, increasing the money supply and potentially doubling the deposits to £400 million.

The Banking System Has £200 Million in Total Deposits