If people never withdraw cash from banks and there are no required reserves, how much money can the banking system potentially create for a given amount of new deposits?

Question

Bodie

Business

11 July, 16:19

If people never withdraw cash from banks and there are no required reserves, how much money can the banking system potentially create for a given amount of new deposits?

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Answers (1)

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Savion Frazier · Answer 1

Answer: an infinite amount of money can be created.

Explanation:

From the question, if there is no withdrawal demands on a bank from it's customers this would imply that there would be no need for reserves to be kept by the bank, as the reserves are back up for the bank to meet up with payment to it's customers in case of future failure on the bank's path.

If withdrawal demands are not existent, the banks can produce and store up an infinite amount of cash.