Suppose you deposit $2,000 cash in your bank. The bank desires to hold 20 percent of all deposits as reserves. What amount of new loans will your bank create immediately after you make the deposit?

Question

Quizplus · Accepted Answer

The bank is required to hold 20 percent of the deposit as reserves, which is 0.20 x $2,000 = $400. Therefore, the remaining $1,600 ($2,000 - $400) can be used to create new loans. The amount of new loans that the bank can create is equal to the deposit multiplied by the money multiplier. Assuming a money multiplier of 5, the bank can create $1,600 x 5 = $8,000 in new loans. However, the question asks for the amount of new loans immediately after the deposit, so the answer is simply $1,600.

Suppose You Deposit $2,000 Cash in Your Bank