Suppose the entire banking system has $10,000 in excess reserves and a required reserve ratio of 20 percent.The deposit-creation potential of the banking system is:
A) $200,000
B) $50,000
C) $20,000
D) $500

Question

Quizplus · Accepted Answer

The deposit-creation potential is calculated using the money multiplier, which is the reciprocal of the required reserve ratio. With a 20% reserve ratio, the multiplier is 5 (1/0.20). Thus, the potential is $10,000 * 5 = $50,000.

Suppose the Entire Banking System Has $10,000 in Excess Reserves