ECONOMICS (CBSE/UGC NET)

Detailed explanation-1: -These changes can lead to increase in money supply. For example, assume the entire banking system has $1000 in deposits and the required reserve ratio is 10% and banks are fully loaned up. That means the total reserve in the banking system is $100.

Detailed explanation-2: -The loan-to-deposit ratio is used to assess a bank’s liquidity by comparing a bank’s total loans to its total deposits for the same period. To calculate the loan-to-deposit ratio, divide a bank’s total amount of loans by the total amount of deposits for the same period.

Detailed explanation-3: -The maximum amount that the bank can lend is 2000 since reserves are 20 percent of the checkable deposit, which means that $20, 000 of reserves is to be maintained by the bank (20% of 1, 00, 000). Thus, the amount they can loan is 22, 000-20, 000=2000. This will increase the checkable deposits and loans by 2000.

Detailed explanation-4: -So, in the case of a bank required to hold 100 percent of deposits in reserves, banks are left with nothing to be given out as loans leading to no money creation in the economy. Thus, holding 100 percent of deposits in reserves will lead to banks creating no money in the economy.