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Scenario: Money Creation
The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves.
-(Scenario: Money Creation) Look at the scenario Money Creation. Immediately after the deposit, reserves _____ and demand deposits _____ by $1,000.

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Quizplus · Accepted Answer

The reserve requirement is 20%, which means the bank can lend out 80% of the deposit. Therefore, the bank increases its reserves by 20% of $1,000 = $200 and lends out the remaining $800, which increases Leroy's demand deposits by $1,000. So, reserves increase by $200 and demand deposits increase by $1,000, making A the correct choice.

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