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qp10. The answer is .20 I simply divided increase amount of reserve by checkable deposit increase...

qp10. The answer is .20 I simply divided increase amount of reserve by checkable deposit increase amount 100/500 .

I need help on explaining why we do it this way. What is the formula.

If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of multiple deposit creation when the required reserve ratio is _____.

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Answer #1

Basically with a deposit of 100, and a given reserve ration, a bank can keep the reserve aside and use the balance to loan out the rest. This is continues indefinitely by each bank in the process so it is the formula of the sum of an infinite GP, in which following equation is used.

CRR is the cash reserve ratio or the percentage of the deposit a bank requires to keep before it can loan out the balance amount.

This process is called the process of credit creation

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