Given a required reserve-deposit ratio of 5% for all banks and assuming individuals hold no cash,total bank reserves of $400 billion can support deposits of
A) $400 billion.
B) $800 billion.
C) $4,000 billion.
D) $8,000 billion.
E) $9,000 billion.

Question

Quizplus · Accepted Answer

The required reserve-deposit ratio of 5% means that for every $100 deposited, banks must keep $5 as reserves and can lend out the remaining $95. Therefore, the total amount of deposits that can be supported by $400 billion in reserves is:

$400 billion / 0.05 = $8,000 billion

Therefore, the correct answer is (D) $8,000 billion.

Given a Required Reserve-Deposit Ratio of 5% for All Banks