Ten bucks in reserve, a lender's itch, multiplied by ten, a money switch! A hundred blooms from one small seed, banking's magic, a supply's cascade indeed. But hold your breath, dear eager soul, true growth may falter, cash takes its toll.
To calculate the potential money supply created by the bank loaning out all its excess reserve, we can use the following steps:
Calculate excess reserve:
Excess reserve = Total reserve - required reserve
Excess reserve = $20 (total reserve) - $10 (required reserve based on 10% ratio and $100 deposit)
Excess reserve = $10
Apply money multiplier:
Money multiplier = 1 / required reserve ratio
Money multiplier = 1 / 0.1
Money multiplier = 10
Multiply excess reserve by money multiplier:
Potential money supply = Excess reserve * Money multiplier
Potential money supply = $10 (excess reserve) * 10 (money multiplier)
Potential money supply = $100
Therefore, if the local bank loans out all of its excess reserve ($10), it has the potential to create an additional $100 in money supply through the process of fractional reserve banking. This additional money supply is created by the borrower spending the loan, which then gets deposited into another bank, and so on.
However, it's important to note that this is just the potential money supply. The actual amount of money created will depend on various factors, such as how much of the loan is spent, how quickly it is spent, and how much of it is deposited back into the banking system.
So, the Potential money supply is $100.