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 currency
Into checking accounts will initially create
A) $8 billion of new checkable deposits.
B) $10 billion of new checkable deposits.
C) $40 billion of new checkable deposits.
D) $200 billion of new checkable deposits.

Question

Quizplus · Accepted Answer

The $40 billion deposit directly increases checkable deposits by the same amount, as the deposit itself counts as a checkable deposit. The legal reserve ratio and excess reserves affect how much more money can be created through loans, not the initial deposit.

Consider the Following Information About a Banking System: New Currency