Answer the question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion;legal reserve ratio = 0.20;excess reserves prior to the currency deposit = $0. Refer to the information.The $40 billion deposit of new currency will support total checkable deposits of:
A) $160 billion.
B) $200 billion.
C) $40 billion.
D) $128 billion.

Question

Quizplus · Accepted Answer

The total increase in checkable deposits can be calculated using the money multiplier formula: 
Change in checkable deposits = (1/required reserve ratio) x change in reserves 
With a legal reserve ratio of 0.20 and $40 billion deposit of new currency, the change in reserves is $40 billion x 0.20 = $8 billion. 
Using the money multiplier formula, the total increase in checkable deposits is: 
(1/0.20) x $8 billion = $40 billion x 5 = $200 billion. 
Therefore, the answer is B, $200 billion.

Answer the Question on the Basis of the Following Information