Suppose a bank gets a new deposit of $100 cash and it has a 20% required reserve ratio. If

the bank lends the maximum amount of money allowed, then the checkable deposits

(including the original deposit) increase by:

a) $20

b) $100

c) $500

d) $1,000

C) $500

Explanation:

First we must determine the money multiplier = 1 / reserve ratio:

money multiplier = 1 / 20% = 5

The bank's checkable deposits originally increase by $100, and since it will be able to lend all the money it can, $80, its checkable deposits will also increase by $80 x 5 (money multiplier) = $400.

So the total increase in the bank's checkable deposits = $100 (original deposit) + $400 (money created through loans) = $500