Imagine that Odyssey National is a brand new bank, and that its required reserve ratio is 10 percent. If it accepts a $1,000 cash deposit, then, excluding the $1,000 initial deposit, the banking system can increase the money supply by:

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Quizplus · Accepted Answer

The banking system can increase the money supply by $9,000 because with a 10% reserve ratio, the bank can lend out $900 of the $1,000 deposit. This $900 can be deposited in another bank, which can then lend out 90% of it, and so on. This process continues, creating a money multiplier effect. The money multiplier is 1/reserve ratio, which is 10 in this case, so the total increase in the money supply is $1,000 * (10 - 1) = $9,000.

Imagine That Odyssey National Is a Brand New Bank, and That