The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers;that is,do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.
CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM
BALANCE SHEET: BANK OF CANADA

-Refer to the above information.The maximum money-creating potential of the chartered banking system is:
A) $5
B) $19
C) $20
D) $0

Question

The following are simplified consolidated balance sheets for the chartered banking system and the Bank of Canada.Do not cumulate your answers;that is,do return to the data given in the original balance sheets in answering each question.Assume a desired reserve ratio of 5 percent for the chartered banks.All figures are in billions of dollars.
CONSOLIDATED BALANCE SHEET: CHARTERED BANKING SYSTEM
  BALANCE SHEET: BANK OF CANADA
 
-Refer to the above information.The maximum money-creating potential of the chartered banking system is:
A) $5 
B) $19 
C) $20 
D) $0

Quizplus · Accepted Answer

The maximum money-creating potential of the chartered banking system is equal to the excess reserves, which is calculated as:
Total Reserves - Desired Reserves = Excess Reserves
$4 + $1 + $2 - ($19 x 0.05) = $3
Therefore, the potential money creation is equal to the excess reserves, which is $3. However, since the Bank of Canada holds $3 in securities, there is no further money creation potential. Therefore, the maximum potential money creation is $20 ($17 in deposits + $3 in excess reserves), but since the Bank of Canada holds securities equal to the excess reserves, the actual money creation potential is $17.

The Following Are Simplified Consolidated Balance Sheets for the Chartered