Question

1. If a commercial bank holds 20% as required reserves, the initial deposit is ksh 10,000, what was the money created by the bank from this initial deposit?

Answer 1

what was the money created by the bank from this initial deposit?

The reserve ratio is 20%. As a result, the money multiplier is $\frac{1}{20\%} = \frac{1}{20} = 5$

The money created is given by:

Created money = $\frac{Initial\ deposit }{Reserves\ ration }$

Created money = $\frac{10000 }{20\%}$

Created money = 50000

Thus, the money created is Ksh. 50000