Suppose the required reserve ratio is 0.20. Total bank deposits are $200 million and the bank...
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?
A. $5 million B. $25 million C. $30 million D. $50 million
Homework Answers
Answer: D. $50 million
Required reserve = Deposits * Required reserve ratio
Required reserve = $200 * 0.20 = $40
Given: Bank holds $50 million in reserves.
Excess reserve = Total reserve - Required reserve
Excess reserve = $50 - $40
Excess reserve = $10 million
Money creation = Money multiplier * Excess reserve
Money multiplier = 1/Required reserve ratio
Money creation = (1/0.20) * 10 = 5 * 10 = 50
Banks would create $50 million, if it does not hold excess reserves.
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