A customer deposits
$50,000
of new cash into Bank 1. The required reserve ratio is 20%, and every bank also chooses to hold excess reserves equal to 5% of its deposits. All loans are re-deposited in full in the banking system (no cash is withdrawn). The first rounds of the process are shown below.
| Bank |
New deposit received |
Reserves kept (25%) |
New loans made |
| Bank 1 |
$50,000 |
$12,500 |
$37,500 |
| Bank 2 |
$37,500 |
$9,375 |
$28,125 |
| Bank 3 |
$28,125 |
$7,031.25 |
$21,093.75 |
| … |
… |
… |
… |
| All banks |
? |
? |
? |
When the process is complete, what is the maximum total increase in bank deposits, and how much new lending is created?
Select one option.