If the banking system has $20 billion in excess reserves and the reserve ratio is 10 percent, the system can
increase its loans by a maximum of $22 billion.

Question

Quizplus · Accepted Answer

With a reserve ratio of 10%, the maximum increase in loans is determined by the money multiplier, which is 1/reserve ratio = 1/0.10 = 10. Therefore, the banking system can increase its loans by a maximum of $20 billion in excess reserves * 10 = $200 billion.

If the Banking System Has $20 Billion in Excess Reserves