Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. The $40 billion deposit of new
Currency will support total checkable deposits of
A) $160 billion.
B) $200 billion.
C) $40 billion.
D) $128 billion.

Question

Quizplus · Accepted Answer

The legal reserve ratio is 0.20, which means that banks must hold 20% of deposits as reserves. With a $40 billion currency deposit, banks can create $40 billion/0.20 = $200 billion in new checkable deposits. Therefore, the correct choice is B.

Consider the Following Information About a Banking System: New Currency