If reserves in the banking system increase by $100, then chequable deposits will increase by $1000 in the simple model of deposit creation when the desired reserve ratio is ________.

Question

Quizplus · Accepted Answer

The simple deposit creation model states that the potential deposit creation is equal to the initial deposit multiplied by the reciprocal of the desired reserve ratio. In this case, if reserves in the banking system increase by $100 and chequable deposits increase by $1000, then the reciprocal of the desired reserve ratio is 10 (i.e. 1000/100 = 10). Therefore, the desired reserve ratio is 0.10 or 10%, which is the correct answer choice in option B.

If Reserves in the Banking System Increase by $100, Then