Question

Suppose that the excess reserves in Toronto Dominion Bank increase by $700. Given a target reserve ratio of 1.0% and no cash drain, the maximum change in deposits for the entire banking system would be

A) $682.50.
B) $700.00.
C) $17,500.00.
D) $28,000.00.
E) $70,000.00.

Answer 1

The maximum change in deposits for the entire banking system with an increase of $700 in excess reserves and a target reserve ratio of 1% would be $70,000.00.

Step-by-step explanation:

When answering the question of how the increase in excess reserves by $700 at the Toronto Dominion Bank would affect the maximum change in deposits for the entire banking system, given a target reserve ratio of 1.0% and no cash drain, we use the money multiplier formula. This formula is Money Multiplier = 1 / Reserve Ratio. With a target reserve ratio of 1%, the money multiplier is 1 / 0.01, which is 100. Therefore, the maximum change in total deposits can be calculated as the excess reserves multiplied by the money multiplier, which equals $700 * 100 = $70,000.00.