Exhibit 19-7 Lower Walloon National Bank $$\begin{array} { | l l | l l | }
\hline { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Reserves } & \$ 10,000 & \text { Checkable deposits } & \$ 10,000 \
\hline
\end{array}$$ In Exhibit 19-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking system loans out all of its excess reserves. Then a $10,000 deposit from Mr. Brown in checkable deposits could create for the entire banking system:
A) $8,000 worth of new money.
B) $2,000 worth of new money.
C) $10,000 worth of new money.
D) $40,000 worth of new money.

Question

Exhibit 19-7 Lower Walloon National Bank $$\begin{array} { | l l | l l | } 
\hline { \text { Assets } } &&{ \text { Liabilities } } \
\hline \text { Reserves } & \$ 10,000 & \text { Checkable deposits } & \$ 10,000 \
\hline
\end{array}$$ In Exhibit 19-7, if the required reserve ratio is 20 percent for all banks, and every bank in the banking system loans out all of its excess reserves. Then a $10,000 deposit from Mr. Brown in checkable deposits could create for the entire banking system:
A) $8,000 worth of new money.
B) $2,000 worth of new money.
C) $10,000 worth of new money.
D) $40,000 worth of new money.

Quizplus · Accepted Answer

The correct answer is D because with a required reserve ratio of 20%, the bank must keep 20% of deposits as reserves and can loan out the remaining 80%. A $10,000 deposit means $2,000 must be kept in reserves (20% of $10,000), leaving $8,000 to be loaned out. However, this $8,000, when deposited in other banks, becomes subject to the same process, creating a multiplier effect. The total amount of new money created in the banking system can be calculated using the money multiplier formula, which is 1/reserve ratio. In this case, 1/0.20 = 5. Thus, the initial $10,000 deposit can potentially create $10,000 * 5 = $50,000 in the banking system. Since the bank already has $10,000 in deposits, the new money created is $50,000 - $10,000 = $40,000.

Exhibit 19-7 Lower Walloon National Bank In Exhibit 19-7, If the Required Reserve Ratio Is 20