Question

Suppose a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio. If

the bank lends the maximum amount of money allowed, then the checkable deposits
(including the original deposit) increase by:
a) $20
b) $100
c) $500
d) $1,000

Answer 1

C) $500

Step-by-step explanation:

First we must determine the money multiplier = 1 / reserve ratio:

• money multiplier = 1 / 20% = 5

The bank's checkable deposits originally increase by $100, and since it will be able to lend all the money it can, $80, its checkable deposits will also increase by $80 x 5 (money multiplier) = $400.

So the total increase in the bank's checkable deposits = $100 (original deposit) + $400 (money created through loans) = $500