Question

Suppose the required reserve ratio is 0.20. Total bank deposits are $200 million and the bank holds $50 million in reserves. How much more money could the bank create if it does not hold excess reserves

Answer 1

Answer:

$50 million

Explanation:

The computation is shown below:

As we know that

Required reserve = Deposits × Required reserve ratio

= $200 million × 0.20

= $40 million

Now the excess reserves is

= Bank reserves - required reserve

= $50 million - $40 million

= $10 million

So, the money creation is

Money creation = Money multiplier × excess reserve

where,

Money multiplier = 1 ÷ required reserve ratio

= 1 ÷ 0.20

= 5

So, the money creation is

= 5 × $10 million

= $50 million