The following is information about a banking system: new currency deposited in the system = $40 billion;desired reserve ratio = 20%;excess reserves prior to the new currency deposit = $0.
-Refer to the above information.The total demand deposit after the expansion of the money supply through loans is:

Question

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The desired reserve ratio is 20%, which means that the bank can lend out 80% of any new currency deposits. Therefore, the bank can lend out 80% of $40 billion, which is $32 billion. This will increase the demand deposits by $32 billion, bringing the total demand deposit to $32 billion + $40 billion = $72 billion. However, the $32 billion that was lent out will also be deposited in other banks, which will then lend out 80% of it, and so on. The total increase in demand deposit will therefore be a multiple of the original new currency deposit. Using the formula for the money multiplier, the total demand deposit will be: $40 billion / (0.20) = $200 billion. Therefore, the answer is B.

The Following Is Information About a Banking System: New Currency