Assume RST Bank has a reserve requirement of 20 percent. If RST Bank borrows $3 million from the Fed, how much new money could be created in the depository institutions system as a result?
A) $3 million.
B) $12 million.
C) $15 million.
D) $600 thousand.

Question

Quizplus · Accepted Answer

When RST Bank borrows $3 million from the Fed, it can lend out 80% of that amount due to the 20% reserve requirement. This initial $3 million can lead to a total money creation of $15 million in the banking system through the money multiplier effect, which is calculated as 1 divided by the reserve requirement (1/0.20 = 5). Therefore, $3 million * 5 = $15 million.

Assume RST Bank Has a Reserve Requirement of 20 Percent