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The reserve requirement is 20%.Leroy receives $1000 as a graduation present and deposits the money in his chequing account.The bank does NOT want to hold excess reserves.
-(Scenario: Money Creation)Refer to Scenario: Money Creation.What is the maximum possible expansion in the money supply as a result of this initial deposit?

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The initial deposit of $1000 creates $1000 in new money. The bank is required to hold 20% of this as reserves, which is $200. This leaves $800 that can be loaned out. This $800 can then be deposited in another bank, which can then loan out 80% of it, or $640. This process can continue until the initial deposit of $1000 has created $4000 in new money.

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