In a deposits-only monetary system with a 5% required reserve ratio, a bank deposit of $1,000 will increase the total amount of bank deposits by:

Question

Quizplus · Accepted Answer

In a deposits-only monetary system with a required reserve ratio of 5%, each $1,000 deposit will create $20,000 of total bank deposits. This is because the bank must hold $50 in reserve ($1,000 x 0.05 = $50) and can lend out $950, which then becomes another deposit in another bank, and that bank must then hold $47.50 in reserve ($950 x 0.05 = $47.50) and can lend out $902.50, which then becomes another deposit in another bank, and so on. This process continues until the total amount of bank deposits equals $20,000 ($1,000 ÷ 0.05 = $20,000). Therefore, the correct answer is C ($20,000).

In a Deposits-Only Monetary System with a 5% Required Reserve