Money and Banking
Name ______________________________________ Hour _______ Due Date ___________
Bank Expansion of Demand Deposits
In a fractional reserve banking system, an initial deposit in a bank can lead to a larger total bank
expansion of the money supply. Assume that all banks can immediately loan out all of their
excess reserves, that the reserve requirement is 20% of deposits, and that all excess reserves
loaned out are deposited in another bank.
If a stranger come into Idaho City and deposited $2,000.00 into Bank 1:
1. How much will Bank 1 have to keep in reserve?
2. How much will Bank 1 be able to loan out in excess reserve?
3. How much will be deposited into Bank 2?
4. How much will Bank 2 be able to loan out in excess reserve?
5. How much will Bank 2 be able to loan out as excess reserves?
6. How much will be deposited into Bank 3?
7. How much will Bank 3 be able to loan out in excess reserve?
8. How much will Bank 3 be able to loan out as excess reserves?
9. How much will be deposited into Bank 4?
10. How much will Bank 4 be able to loan out in excess reserve?
11. How much will Bank 4 be able to loan out as excess reserves?
12. How much will be deposited into Bank 5?
13. How much will Bank 5 be able to loan out in excess reserve?
14. How much will Bank 5 be able to loan out as excess reserves?
15. If this process continues what will eventually be the total expansion of the money
supply?
16. How much of the money in question 15 was created by the banking system?
Ch 10 Money and Banking
BHS/T. Mitchell
25 points
The Reserve Requirement and the Money Multiplier
The Central Bank sets the reserve requirement for the banking system of Idaho City. All banks in
Idaho City must keep the required reserves on deposit at the Central Bank or in their vaults in
the form of cash. All banks loan out their excess reserves.

A $10,000.00 deposit is made into a bank in Idaho City. For the following reserve
requirements fill in the amount of required reserves.

For each of the following reserve requirements fill in the amount of excess reserves.

The money multiplier is 1 divided by the reserve requirement. For each of the following
reserve requirements fill in the money multiplier.

The total amount by which the money supply can expand is the money multiplier times
the amount of the initial deposit. For each of the following reserve requirements fill in
the amount by which the money supply could expand.
Reserve
Requirement
10%
20%
25%
33.33%
50%
Required
Reserves
Excess
Reserves
Money
Multiplier
Money Supply
Expanded