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# Money multiplier, credit creation, required reserve ratio

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Use a simple Balance Sheet for a typical bank, which has \$5,000 of deposits, a required reserve ratio of 10 percent, and excess reserves of \$0.
a. What is the value of money multiplier?
b. If the bank lends it's maximum amount of excess reserve, what would be the total amount credit creation in the entire banking system with this initial deposit of \$5,000?
c. If Fed raises the required reserve ratio to 20%, how will it change your answers to a & b above?

##### Solution Summary

The solution calculates the value of money multiplier, total amount credit creation in the entire banking system and answers how these calculations would change if Fed raises the required reserve ratio.

##### Solution Preview

Balance Sheet of the Bank:

Assets:
Reserves: \$500 =10%*5000
Loans: \$4,500
Total Assets: \$5,000

Liabilites:
Deposits: \$5,000
Total Liabilities: \$5,000

a. What is the value of money multiplier?

The money multiplier is the reciprocal of the ...

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