Question

Suppose the Federal Reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have $5 million more they wish to lend out. If the reserve requirement is 10 percent, how much more money can banks create if they lend out the remaining amount? a. $40 million b. $50 million c. $45 million d. $55 million

Answer 1

b. $50 million

Step-by-step explanation:

The bank will lend the cash, then the borrower will deposit this amount and open the possibility for another loan after subtract the 10% reserive ratio.

This process is repeated indefinitively with decreasing loans amount. It finds it limits in the inverse of the reverse ratio

initial loan: $ 5,000,000

reserve ratio 10% = 1/0.1 = 10 cash multiplier

5,000,000 x 10 = 50,000,000