The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:

-Refer to the information above to answer this question.After the deposit of $20,what is the maximum amount by which this commercial banking system can expand the supply of money?

Question

The following is the balance sheet of the whole banking system (all figures are in $billions)which has a target reserve ratio of 20 percent:
 
-Refer to the information above to answer this question.After the deposit of $20,what is the maximum amount by which this commercial banking system can expand the supply of money?

Quizplus · Accepted Answer

The maximum amount the banking system can expand the supply of money is equal to the deposit multiplied by the inverse of the reserve ratio. The deposit is $20 billion, and the reserve ratio is 20%, or 0.2, so the maximum expansion is 20/0.2 = $100 billion. However, the banking system already has excess reserves of $20 billion, so the actual maximum amount by which it can expand the supply of money is reduced by that amount, giving us a final answer of $80 billion.

The Following Is the Balance Sheet of the Whole Banking