Question

Answer the question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion; legal reserve ratio = 0.20; excess reserves prior to the currency deposit = $0. Refer to the information. With the $40 billion deposit, the banking system will be able to expand the money supply through loans by:

Answer 1

money supply through loans is $200 billion

Step-by-step explanation:

given data

currency deposited = $40 billion

reserve ratio = 0.20

to find out

money supply through loans

solution

first we find here money multiplier that is

money multiplier = 1 / reserve ration ....................1

put here value in equation 1

money multiplier = 1 / 0.20

money multiplier = 5

so here

money supply through loans = 5 × currency deposited ..............2

put here value

money supply through loans = 5 × 40 = 200

so money supply through loans is $200 billion