Banks have £100 billion in actual liquid assets, but believe that only £80 billion are necessary to be kept as reserves. As a result, money supply will expand by £20 billion.

Question

Quizplus · Accepted Answer

The expansion of the money supply depends on the reserve ratio and the process of money creation through lending, not just the excess reserves. Banks can potentially create a multiple of the £20 billion excess reserves through the money multiplier effect, leading to a potential increase in the money supply greater than £20 billion.

Banks Have £100 Billion in Actual Liquid Assets, but Believe