The deposit multiplier indicates that banks must keep 10% of all deposits in reserve if the reserve requirement is 10%,
But they can create money and stimulate economic activity by lending out the remaining 90%.Therefore, if someone deposits $100, the bank must reserve $10 but can lend $90.
How are excess reserves calculated?
Excess Reserves = Total Reserves minus Required Reserves Take a bank with $20 million in deposits as an illustration. It must keep at least $2 million on hand if its reserve ratio is 10%.On the other hand, if the bank has $3 million in reserves, $1 million of those reserves are in excess.
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