Question

Suppose the Canadian banking system jointly has $20 million in reserves (cash and deposits at the Bank of Canada), all banks have a target reserve ratio of 20%, and there are no excess reserves. What is the amount of deposits in the banking system?

A) $4 million
B) $40 million
C) $80 million
D) $100 million
E) $120 million

Answer 1

The total amount of deposits in the Canadian banking system, given reserves of $20 million at a reserve ratio of 20% with no excess reserves, is $100 million.

Step-by-step explanation:

To calculate the deposits in the banking system, we need to understand the concept of reserve ratio. The reserve ratio represents the percentage of deposits that banks are required to hold as reserves. In this case, the target reserve ratio is 20%. You are looking to find the total amount of deposits in the Canadian banking system given that the total reserves are $20 million and the reserve ratio is 20%. With no excess reserves, this means the total reserves are exactly 20% of the total deposits. To calculate the total deposits, you divide the total reserves by the reserve ratio:

Total Deposits = Total Reserves / Reserve Ratio

Total Deposits = $20,000,000 / 0.20 = $100,000,000

Therefore, the total amount of deposits in the banking system is $100 million (Option D).