Question

Assume that Banc One receives a primary deposit of $1 million. The bank must keep reserves of 20 percent against its deposits. Prepare a simple balance sheet of assets and liabilities for Banc One immediately after the deposit is received.What would be the maximum amount of checkable deposits after deposit expansion, and what would be the money multiplier?

Answer 1

Step-by-step explanation:

Given that

Primary deposit = $1,000,000

Reserves = 20%

So, the simple balance sheet is presented below:

Bank displayed in asset is increased by$1,000,000

And reserves increased by

= $1,000,000 × 20%

= $200,000

The maximum amount of check-able deposits after deposit expansion would be

= Primary deposit × required reserves ratio

= $1,000,000 × 11%

= $110,000

So, the money multiplier is

= 1 ÷ required reserve ratio

= 1 ÷ 11%

= 9.09