homework help please

Question

Find the amount of money that would be created in the banking system because of the money multiplier if the required reserve ratio is 6%, and a bank that had been holding $550 as excess reserves decides to loan all this money out.

Answer 1

A required reserve ratio of 6 percent means that banks have to keep 6% of their deposits in reserve and can loan out the rest. If we denote the required reserve ratio as R, in this problem R = 6 percent = 0.06.

We know that the formula for the money multiplier m = 1/R.

Since in this problem R = 6% or 0.06, the money multiplier m = 1/0.06 = 16.67.

If our bank decides to loan out the $550 of excess reserves, the maximum amount of money that the banking system can create after infinite rounds of money creation is given by the formula (m X Reserves) = 16.67 X $550 = $9,166.67.