Question

The banking system has $5,000 in reserve, $45,000 in loans, and $50,000 in deposits. Currently the reserve requirement is 10%. If the Fed lowers reserve requirement to 5%, what is the maximum amount of loans the banking system could make?

Answer 1

$100,000

Step-by-step explanation:

The total amount of loans the banking system can make = total reserves available / reserve requirement = $5,000 / 5% = $100,000

Banks have the ability to create money, since they can lend money to a client, and if that client leaves the money on the bank in a checking account, the bank can lend it again, and the circle goes on and on. This creation of money results from the money multiplier. Money multiplier = 1 / reserve requirement = 1 / 5% = 20