You deposit $4,000 in currency in your checking account. The bank holds 20 percent of all deposits as desired reserves. As a direct result of your deposit, your bank will make loans and by so doing will create
A) $1,600 of new money.
B) $200 of new money.
C) $3,200 of new money.
D) $800 of new money.

Question

Quizplus · Accepted Answer

The bank must hold 20% of the deposit as desired reserves, which is $800 in this case. The remaining $3,200 can be lent out. Since loans create deposits, the bank can therefore create $3,200 in new money through lending.

You Deposit $4,000 in Currency in Your Checking Account