Question

If the reserve ratio is 12.5 percent, then $1,000 of additional reserves can create up to

Answer 1

It is required by the country’s central bank that a portion of the depositors’ balances must be in the form of hand as cash. This portion is called the reserve ratio.

Now if an additional reserve of $1,000 is allocated and this is only 12.5 percent, therefore this can create up to

capital = $1,000/0.125

capital = $8,000