Assume the required reserve ratio is 16.67 percent and that the commercial banking system has $110 million in excess reserves. The maximum amount of new money which the banking system could create is about:
A) $110 million
B) $330 million
C) $660 million
D) $1,353 million

Question

Quizplus · Accepted Answer

The maximum amount of new money that the banking system could create is determined by the simple deposit multiplier formula:

1/required reserve ratio

In this case, the required reserve ratio is 16.67 percent or 0.1667.

Thus, the maximum amount of new money that could be created is:

1/0.1667 x $110 million = $660 million.

Assume the Required Reserve Ratio Is 16