If the banking system has $20 billion in excess reserves and if the reserve ratio is 10 percent, the system can increase its loans by a maximum of $22 billion.

Question

Quizplus · Accepted Answer

The banking system can increase its loans by a maximum of $200 billion, not $22 billion, because the money multiplier is 1 divided by the reserve ratio (1/0.10 = 10), so $20 billion in excess reserves can support $200 billion in new loans.

If the Banking System Has $20 Billion in Excess Reserves