Question

If all the banks in the banking system collectively have $20 million in cash reserves and have a target reserve ratio of 5%, the maximum amount of deposits the banking system can support is

A) $4 million.
B) $40 million.
C) $80 million.
D) $100 million.
E) $400 million.

Answer 1

With $20 million in cash reserves and a 5% reserve ratio, the banking system can support a maximum of $400 million in deposits. The correct answer is E) $400 million.

Step-by-step explanation:

The question asks about the maximum amount of deposits the banking system can support based on a given amount of cash reserves and a target reserve ratio. If the banks in the banking system collectively have $20 million in cash reserves and a target reserve ratio of 5%, the maximum amount of deposits that can be supported is calculated as follows:

Maximum deposits = Cash reserves / Reserve ratio

Maximum deposits = $20,000,000 / 0.05

Maximum deposits = $400 million.

Therefore, the correct answer is E) $400 million.