If a commercial banking system has $200,000 in checkable deposits, actual reserves of $70,000, and a reserve
ratio of 20 percent, then the banking system can expand the supply of money by a maximum of $180,000.

Question

Quizplus · Accepted Answer

Given a reserve ratio of 20%, the required reserves for $200,000 in checkable deposits would be $40,000 (20% of $200,000). Since the actual reserves are $70,000, the excess reserves (which can be loaned out) are $30,000 ($70,000 - $40,000). The maximum expansion of the money supply is determined by the money multiplier, which is 1 divided by the reserve ratio (1/0.20 = 5). Therefore, the maximum expansion of the money supply is $30,000 times the money multiplier of 5, which equals $150,000, not $180,000.

If a Commercial Banking System Has $200,000 in Checkable Deposits