Suppose the entire banking system has $50 million in excess reserves and a required reserve ratio of 10 percent.The deposit-creation potential of the banking system is:
A) $500 million
B) $50 million
C) $10 million
D) $5 million

Question

Quizplus · Accepted Answer

The deposit-creation potential of the banking system is determined by the formula: 
Deposit creation potential = excess reserves / required reserve ratio 
In this case, excess reserves = $50 million and the required reserve ratio is 10 percent (or 0.10). 
So, the deposit-creation potential is: 
$50 million / 0.10 = $500 million. 
Therefore, the correct answer is A) $500 million.

Suppose the Entire Banking System Has $50 Million in Excess