CE 10-11(B)

Suppose the balance sheet of the banking system was as follows:

During the credit crisis, the banks increased the reserve ratio to 40% for safety purposes. This resulted in a change in the bank deposits.

(i) Calculate the maximum possible change in the bank deposits. (3 marks)

(ii) Explain briefly the process of deposit contraction resulting from the above change in the reserve ratio. (4 marks)