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.Topic: The Monetary Multiplier

Question

Quizplus · Accepted Answer

The banking system can expand the money supply by a maximum of $150,000, not $180,000. With a reserve ratio of 20%, required reserves are $40,000 ($200,000 * 0.20). Excess reserves are $30,000 ($70,000 - $40,000). The money multiplier is 5 (1/0.20), so the maximum expansion is $30,000 * 5 = $150,000.

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