Question

On a certain date, the banking system had $40 billion in excess reserves. The legally required reserve ratio was 20 percent.

Potentially, if these funds were loaned and eventually the entire amount re-deposited with a bank, the banking system as a whole could increase the money supply by _______,

Answer 1

The answer is $200 billion

Step-by-step explanation:

Legal reserve ratio is the minimum fraction of customers' deposits that the banks are required to keep by law as cash. This minimum ratio is determined by Central banks while money supply is the total amount of money in circulation at a particular time.

Legal reserve is 100% ÷ 20%

= 5

Therefore, the banking system as a whole could increase the money supply by $200 billion($40 billion x 5)