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

Question

Quizplus · Accepted Answer

When you withdraw $500 from your checking account and do not redeposit it into the banking system, banks lose the ability to lend out a portion of that money. With a 10 percent reserve requirement, banks could have used that $500 to support up to $5,000 in additional lending by lending out 90% of deposits and keeping 10% in reserve. This is based on the money multiplier effect, where the maximum change in deposits is equal to the initial change in bank reserves divided by the required reserve ratio.

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