Question

If a single banks faces a required reserve ratio of 20 percent, has total reserves of $500,000, and checkable deposit liabilities of $400,000, what is the maximum amount of money this bank could create (add to the money supply)

Answer 1

Tthe maximum amount of money this bank could create given the checkable deposits is $2,000,000.

What is the maximum amount of money the banik can create?

The maximum amount of money the bank create is a function of the reserve ratio and the checkable deposits. Reserve ratio is the percentage of deposits that must be kept as reserves.

Maximum deposit = deposits / reserve ratio

$400,000/ 0.2 = $2,000,000

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