Suppose the required reserve ratio is 20%. What is the maximum amount of total money supply that can be created from an initial deposit of $200? In general, why might the actual amount of total money creation be less than the maximum?
The money multiplier is the reciprocal of the reserve ratio. Accordingly, the money multiplier is 5 . This implies the maximum total money supply is $200 x 5 = $1,000.
The money multiplier assumes that banks loan out all available reserves. In reality, banks hold more in reserves than required by the Fed. This implies the actual impact will be less than the maximum amount.
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