Question

A banking system with a reserve ratio of 20% and a change in reserves of $1 million can increase its total demand deposits by:A. $200,000.B. $5 million.C. $1 million.D. $800,000.

Answer 1

The banking system can increase its total demand deposits by $5 million.

Step-by-step explanation:

The banking system can increase its total demand deposits by $5 million.

The reserve ratio is the percentage of deposits that a bank is required to hold in reserve. In this case, the reserve ratio is 20%. If the bank has a change in reserves of $1 million, it can increase its total demand deposits by $5 million ($1 million divided by 0.2).

Answer 2

Answer: option B is correct

Explanation: In simple words demand deposit is similar to those funds held in a checking account. Demand deposits serves as the base of the money supply of the country.

Demand deposit can be computed using following formula :-

`=\:(demand\:deposit)/(required\:reserve\:ratio)`

`=\:(1,000,000)/(20\%)=\:\$5,000,000`