If the required reserve ratio is 10%, how much of a new $10,000 deposit can a bank lend? What is the potential impact on the money supply? Recall for introductory macroeconomics that the money multiplier = 1/(required reserve ratio).
Answer:
The bank must retain $10,000 × 10%, or $1,000 of the new deposit. The remaining $9,000 can be lent to, for example, mortgage borrowers, commercial borrowers, etc. Since the reserve requirement is 10%, the potential money multiplier is 1/0.10 or 10. The $10,000 deposit can potentially increase the money supply by $100,000.