Question

    Consider a fractional reserve banking system with a

    legally required reserve-deposit ratio of m. Suppose that an individual deposits ID dollars in one bank. Then, the economywide change in total deposits
    A will be at most ID / m Correct Answer Incorrect Answer
    B will be equal to ID / m Correct Answer Incorrect Answer
    C will be equal to m / ID Correct Answer Incorrect Answer
    D will be at most m / ID Correct Answer Incorrect Answer
    E none of these Correct Answer Incorrect Answer

    Solution

    The total change in deposits is equal to ID/m if nobody wants to hold currency and banks lend to their limit. If these two assumptions are relaxed, the increase in deposits is lower. So, in general, the increase in total deposits is at most ID/m.

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