Joe has never trusted banks and always kept his money in cash. Joe pulls out his

Question

Joe has never trusted banks and always kept his money in cash. Joe pulls out his money jar, discovers that it has $20,000 in it, and decides it is unsafe to keep that much cash. Joe stops at the Local National Bank the following day, opens a checking account, and deposits the $20,000.

Assume that all banks in the banking system have a 10% reserve requirement. Further, assume that all banks in the banking system are fully loaned up both before and after Joe makes his deposit. Based on the Multiple Expansion of Bank Deposits concept, answer the following:

1. By what amount will total lendable deposits in the banking system increase after the initial deposit?
2. By what amount will new loans in the banking system increase given a monetary multiplier of 10 ( 1/.1)?
3. By what amount will reserves in the banking system increase after the initial deposit?

Explanation / Answer

1. $18,000

2. $180,000

3. $2000

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