1. What is Fractional Reserve Banking?

Fractional reserve banking is a system where banks keep only a fraction of deposits as reserves and lend out the remainder. This process creates additional money in the economy through the money multiplier effect.

2. How Does the Calculator Work?

The calculator uses the money creation formula:

Where:

• \( Initial\ Deposit \) — The original amount deposited in the bank (USD)
• \( Reserve\ Ratio \) — The fraction of deposits that banks must hold in reserve (unitless)

Explanation: The formula shows how much new money can be created through the banking system from an initial deposit.

3. Importance of Reserve Ratios

Details: Reserve ratios determine how much money banks can create. Lower ratios allow more money creation but increase risk, while higher ratios make the system more stable but limit money creation.

4. Using the Calculator

Tips: Enter the initial deposit in USD and the reserve ratio as a decimal (e.g., 0.1 for 10%). Both values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's a typical reserve ratio?
A: Reserve requirements vary by country, often ranging from 0% to 10% of deposits.

Q2: Does this represent real money?
A: It represents potential money creation through the banking system's lending activities.

Q3: What limits money creation in reality?
A: Banks may hold excess reserves, and borrowers may not deposit all funds back into the banking system.

Q4: How does this affect inflation?
A: Excessive money creation can lead to inflation if it outpaces economic growth.

Q5: What's the money multiplier?
A: The money multiplier is simply 1/reserve ratio, showing how much the money supply could increase.