Suppose Warren Buffet withdraws $1 million from his checking account at Chase Bank.If the required reserve ratio is 20 percent,what is the maximum change in deposits in the banking system?

Question

Quizplus · Accepted Answer

The required reserve ratio is 20 percent, which means that banks must hold 20 percent of their deposits in reserve. If Warren Buffet withdraws $1 million from his checking account, Chase Bank must reduce its deposits by $1 million. To maintain the required reserve ratio, Chase Bank must also reduce its reserves by 20 percent of $1 million, or $200,000. This means that the maximum change in deposits in the banking system is -$1 million.

Suppose Warren Buffet Withdraws $1 Million from His Checking Account