Answer :
Final answer:
A bank with a required reserve ratio of 10% and $20,000 in excess cash could potentially loan up to $200,000 due to the money multiplier effect.
Explanation:
The required reserve ratio is the portion of depositors' balances that banks must have on hand as cash.
This is a requirement by the Federal Reserve System and is typically set at 10 percent for most banks.
If a bank has $20,000 in excess, this means this is the amount of cash the bank has above and beyond this requirement. Because of the 10% reserve requirement, theoretically this bank can loan up to $200,000.
This is because when they loan out money, it will ultimately be deposited back into the banking system and the bank will recover its reserves, with only 10% of the new amount being needed as reserve. This process amplifies the amount a bank can loan above its actual reserves, and it’s known as the money multiplier effect.
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