Assume that the reserve ratio is 20 percent and banks in the system are loaning out all their excess reserve. If people collectively cash out $10 billion from their checking accounts, then the lending ability of the banking system will be:

Question

Quizplus · Accepted Answer

The reserve ratio is 20 percent, which means that banks must hold 20 percent of their deposits as reserves. If people collectively cash out $10 billion from their checking accounts, then banks will lose $10 billion in deposits. This means that they will have to reduce their lending by $50 billion (5 times the amount of the deposit withdrawal) in order to maintain the required reserve ratio.

Assume That the Reserve Ratio Is 20 Percent and Banks