Question

QXR bank suddenly acquires total reserves of $10,000 and decides to lend an amount equal to its newly acquired excess reserves. If the required reserve ratio is 20 percent, the total amount of new money created will be

Answer 1

Money Created = $50000

Step-by-step explanation:

Money Multiplier is ratio of multiple times final deposits, created by initial deposits received by bank. It is determined by Legal Reserve Ratio to be kept by commercial banks, as per central banks commands.

Final Deposits / Initial Deposits = 1/LRR

Given LRR = 0.20, Money Multiplier = 1/ 0.20 = 5 here

This means Final Deposits will be 5 times Initial Deposits. So given intital deposits = 10000 , they will be 10000 x 5 i.e = $ 50000