Question

Suppose that the reserve ratio is 25% and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by a maximum of

Answer 1

Answer:

$400

Explanation:

Given that

Reserve ratio = 25%

Deposit cash in a bank = $100

So, the maximum amount of increasing the checking account balance would be

= Deposit cash in a bank ÷ Reserve ratio

= $100 ÷ 25%

= $400

We simply divide the cash deposited by the reserve ratio so that the accurate value could come i.e maximum increase checking account balance.