If a commercial banking system has $200,000 in checkable deposits and actual reserves of $70,000, then with a reserve ratio of 20 percent the banking system can expand the supply of money by a maximum of $180,000.

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Quizplus · Accepted Answer

The banking system can expand the money supply by a maximum of $150,000, not $180,000. With a reserve ratio of 20%, required reserves are $40,000 (20% of $200,000), leaving $30,000 in excess reserves. The money multiplier is 5 (1/0.20), so $30,000 in excess reserves can support $150,000 in new loans.

If a Commercial Banking System Has $200,000 in Checkable Deposits