Suppose the desired reserve ratio is 20 percent.And suppose the Bank of Canada injects $10,000 of new excess reserves.What will this injection create, assuming no bank holds excess reserves and nobody withdraws cash?

Question

Quizplus · Accepted Answer

With a reserve ratio of 20%, each dollar of reserves supports $5 of deposits because 1/0.20 = 5. Therefore, injecting $10,000 of new excess reserves can create $50,000 in new chequable deposits as banks lend out these reserves, which are then deposited and re-lent in a process called the money multiplier effect.

Suppose the Desired Reserve Ratio Is 20 Percent