Question

Suppose the Federal Reserve increases bank reserves and banks lend out some of these reserves, but at some point banks still have $5 million more they wish to lend out. If the reserve requirement is 10 percent, how much more money can banks create if they lend out the remaining amount?

Answer 1

$50 million

Step-by-step explanation:

Given that,

Suppose the Federal Reserve increases bank reserves and banks lend out some of these reserves,

Amount of money available = $5 million

Reserve requirement ratio = 10 percent

Money multiplier:

= 1/ Reserve requirement ratio

= 1/ 0.10

= 10

Money can banks create if they lend out the remaining amount:

= Money multiplier × Amount of money

= 10 × $5 million

= $50 million