If the entire banking system has total deposits of $4 billion and a reserve requirement of 5 percent, then the maximum possible amount of loans that the banking system can make equals $2 million.

Question

Quizplus · Accepted Answer

The maximum possible amount of loans that the banking system can make is actually $3.8 billion, calculated as follows:

- Total deposits = $4 billion 
- Reserve requirement = 5% of total deposits = 0.05 x $4 billion = $200 million 
- Excess reserves = Total deposits - Reserve requirement = $4 billion - $200 million = $3.8 billion 
- The banking system can make loans up to the amount of excess reserves, which in this case is $3.8 billion.

If the Entire Banking System Has Total Deposits of $4