I've got a question about the fractional reserve banking system. The amount of new money created by a deposit of $1000 is $5000, but how do I calculate the value of the loans created by that, and the value of the reserves. My guess is:
$1000/.20=$5000 loans $1000/(1-.20)=$1250 reserves
Is this correct?
Thanks!!!!!
The actual amount of loans will be $4000 (800 + 640 + 512 + ... = 800/.2)
The reserves will be $1000 ( 200 + 160 + 128 + ... = 200/.2)
--Pete
The new deposit created $5000 dollars of new deposits, that's the multiplied amount, however, there is no way of knowing how much NEW money has been created without first knowing where the initial deposit came from. At a minimum $4000 new money and at a maximum, $5000.
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