Question

Imagine that Kristy deposits​ $10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%.

Refer to the scenario above. If the required reserve ratio is 10​ percent, an increase in bank reserves of​ $1,000 can support an increase in checking account deposits​(including the original​ deposit) in the banking system as a whole of up to

A.

​$100.

B.

​$10,000.

C.

​$1,000.

D.

​$100,000.

Answer 1

Required reserve ratio = 10% or 0.10

Calculate the value of money multiplier -

Money multiplier = 1/Required reserve ratio

Money multiplier = 1/0.10 = 10

The value of money multiplier is 10.

Increase in bank reserves = $1,000

Calculate the increase in checking account deposit in the banking system as a whole -

Increase in checking account deposit = Increase in bank reserves * Money multiplier

Increase in checking account deposit = $1,000 * 10 = $10,000

The checking account deposit in the banking system as a whole will increase by $10,000.

Hence, the correct answer is the option (B).