If the amount of high-powered money were 100 and the bank reserve holding ratio was 0.25 then the maximum stock of deposits would be (assume that citizens prefer to keep 10% of their money as cash)

Question

Quizplus · Accepted Answer

The maximum stock of deposits that can be created by a bank is determined by the money multiplier. The money multiplier is the reciprocal of the reserve ratio. Therefore, the money multiplier in this case is 1/0.25 = 4.

However, citizens prefer to keep 10% of their money as cash, so the effective reserve ratio is 0.35 (0.25 + 0.1). Therefore, the maximum stock of deposits that can be created is 100 x 4 x 0.35 = 140, which is then multiplied by 1.1 to account for the cash preference of households, giving a final answer of approximately 314.

If the Amount of High-Powered Money Were 100 and the Bank