Question

if city bank recevies $60,000 in new deposits and the reserve requirement ratio is 5%. How much does the total new checking deposits equal in the commerical banking system?

Answer 1

Using the simple deposit multiplier formula, we can calculate how much this $60,000 increase in deposit in the first bank (city bank) increases the total deposits in the commercial banking system.

Deposit multiplier = 1/ required reserve ratio = 1/5% = 20

Assuming the city bank doesn't hold any excess reserves, the $60,000 in new deposits received by the city bank will increase the total new checking deposits in the commercial banking system by $(60,000 * 20) = $1,200,000.