If a banking system receives an initial deposit of $85,000 and the reserve requirement is .25, the deposits in the banking system (including the initial deposit) can be expanded by

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Quizplus · Accepted Answer

The correct answer is B because the deposits in the banking system can be expanded by $340,000. The reserve requirement is the amount of money that banks are required to hold in reserve. In this case, the reserve requirement is .25, which means that banks must hold 25% of their deposits in reserve. The remaining 75% of deposits can be loaned out. The initial deposit of $85,000 can be expanded by $340,000 because the bank can loan out 75% of each deposit.

If a Banking System Receives an Initial Deposit of $85,000