-Refer to Table 8.1. Suppose individuals in this country hold no cash. Assuming the reserve ratio is 10 percent, what will be the bank system's loans at the end of the money creation processes?

Question

Quizplus · Accepted Answer

Given a reserve ratio of 10%, banks will hold 10% in reserves and loan out 90% of any deposits. Without cash holdings, all money is deposited in banks, allowing for a maximum expansion of the money supply through loans. The initial deposit can be multiplied in the banking system by a factor of 1/reserve ratio, which is 1/0.10 = 10. If the initial deposit is not provided, we assume it's the base for calculating maximum loans, implying every $1 can support $10 in loans due to the money multiplier effect. Thus, if the question implies an initial base that supports $2,000,000 in total money (deposits + loans), loans would be $1,800,000 because the total money includes the initial deposit plus the created loans, fitting the formula of money multiplier effect.