Suppose you withdraw $500 from your chequing account deposit and bury it in a jar in your back yard.If the desired reserve ratio is 10 percent, chequing account deposits in the banking system as a whole could drop up to a maximum of

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When you withdraw $500 from your chequing account and do not redeposit it into the banking system, banks lose the ability to use that $500 as a base for creating additional loans. With a 10 percent reserve ratio, banks are required to keep 10% of deposits on hand but can loan out the rest. Therefore, the initial $500 withdrawal could theoretically reduce the total banking system's ability to create new money through loans by up to $5,000 ($500 / 0.10 = $5,000), as each dollar deposited can support up to ten times that amount in loans.

Suppose You Withdraw $500 from Your Chequing Account Deposit and Bury