CFA Level I · CFA Level I Exam · Monetary Policy
A bank receives a new cash deposit of 50,000 and the reserve requirement is 10%. Assuming the bank lends out all excess reserves and every loan is redeposited in the banking system, the maximum increase in total deposits created by the banking system, including the original deposit, is closest to:
Total deposits can rise by 500,000. With a 10% reserve requirement the multiplier is 10, and 50,000 times 10 gives 500,000 including the original deposit. Only 450,000 of this is new lending, so that figure is wrong when the original deposit is counted.
- A45,000
- B450,000
- C500,000Correct
Explanation
The multiplier is 1/0.10 = 10, so total deposits can reach 50,000 × 10 = 500,000. The new lending created is 450,000, which is the second option, but it excludes the original deposit. The 45,000 figure is only the first-round loan.
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