Question

Suppose that banks had a desired reserve ratio of 4 percent, $15 billion in currency, no excess reserves, and deposits at the central bank of $5 billion. What is the amount of deposits created through the money multiplier process?

Answer 1

The banking system can potentially create $500 billion in deposits through the money multiplier process, given a desired reserve ratio of 4%, $15 billion in currency, and $5 billion in deposits at the central bank.

Step-by-step explanation:

The student's question involves calculating the amount of deposits created through the money multiplier process. Given a desired reserve ratio of 4 percent, the money multiplier would be calculated as 1 divided by the reserve ratio (0.04), which equals 25. The total amount of deposits that can be created in the banking system is determined by multiplying the total reserves by the money multiplier.

In this case, the total reserves of the banks are the sum of currency held ($15 billion) and the deposits at the central bank ($5 billion), which total to $20 billion. Therefore, the calculation for the total deposits created is:

• Money Multiplier: 1 / 0.04 = 25
• Total Deposits Created: Total Reserves x Money Multiplier = $20 billion x 25
• Total Deposits Created: $500 billion

So, the banking system can potentially create $500 billion in deposits through lending, based on the initial reserves and desired reserve ratio.