Question

Suppose a banking system receives a new deposit of $1,000. If the reserve requirement is 20%, by how much can the total volume of deposits in that banking system ultimately rise as a result, assuming all excess reserves are loaned out and all loan proceeds are re-deposited?

Answer 1

Increase in initial deposit will be $4000

Step-by-step explanation:

We have given initial deposit = $1000

Required reserve ratio = 20 % = 0.2

We have to find the total increase in deposit

We know that total increase in deposit =
`(intial\ deposit)/(required\ reserve\ ratio)-initial\ deposit`

So We know that total increase in deposit =
`(1000)/(0.2)-1000=$4000`

So increase in initial deposit will be $4000