Final answer:
An initial deposit of $80 with a required reserve ratio of 20% will create $400 in the economy owing to the multiplier effect in the banking system.
Step-by-step explanation:
If the required reserve ratio is 20% and you want to calculate the initial deposit needed to create $400 of new money, you use the money multiplier concept.
The money multiplier formula is 1 divided by the reserve ratio. So if the reserve requirement is 0.20 (or 20%), the money multiplier is 1 / 0.20, which equals 5.
Therefore, to find out how much the initial deposit should be to create $400, you divide the $400 by the money multiplier (5). The calculation is $400 / 5, which gives us an initial deposit of $80.
Thus, an initial deposit of $80 with a 20% reserve ratio will create $400 in the economy through the process of money creation in the banking system.