Ms. Smith withdraws $1,000 from her safe and deposits the money in a bank. If the bank holds no excess reserves and the reserve requirement is 10 percent, how will this deposit increase the bank's required reserves and the bank's loans?

how will this deposit increase the bank's required reserves

the bank's reserves will increase by $1,000 x 10% = $100

and the bank's loans?

this deposit will increase the amount of money that the bank can loan by $1,000 - $100 = $900

on the other hand, this deposit can have a larger effect on the total banking system through the money multiplier:

money multiplier = 1 / required reserve rate = 1 / 10% = 10

effect on the total banking system = (initial deposit x money multiplier) - initial deposit = ($1,000 x 10) - $1,000 = $10,00 - $1,000 = $9,000

Required reserve increases by $100

Loanable funds increases by $900

Explanation:

Given the following;

Deposit = $1000

Reserve requirement = 10% (This is the minimum amount which a bank should hold as reserve, that is it should be kept in the bank's coffers and not be loaned out).

With a 10% Reserve requirement (RR) and a deposit of $1,000

Required reserve = (10:100) * 1000

Required reserve = 0.1 * 1000 = $100

B.) Once the required reserve has been deducted, the rest may be loaned out. Therefore,

Deposit - Required reserve

$1000 - $100 = $900