Question

Suppose a commercial banking system has $ 500,000 of outstanding checkable deposits and actual reserves of 10,000. If the reserve ratio is 0.2%, the banking system can expand the supply of money by a maximum of $ ____.

(Put only numbers in your answer; do not put comma in your answer.)

Your Answer:

Answer 1

Bank's checkable deposit = $500,000

If the required reserve ratio is 0.2%, then the commercial bank's required reserve = $500,000 * 0.2% = $1000

The bank's actual reserve = $10,000. If required reserve is $1000, then excess reserve = $(10,000 - 1000) = $9000

If the bank loans out all of it's excess reserves, it will be able to expand the money supply by (excess reserve * money multiplier) = [excess reserve * (1/required reserve)] = $9000 * (1/0.2%) = $9000 * (100/0.2) = $4,500,000

Answer: $4,500,000