Assumptions Underlying the Example - Key Concept

Let’s assume that the Federal Reserve Bank injects $1,000 in cash into the banking system. The banks that form the banking system have a choice. Should the bank lend the money or put that money in reserve? Let's assume that there is a required reserve rate of 10%. That means for every dollar the bank has on deposit from its customers, the bank must put 10% on reserve. We are also going to assume that the remaining 90% of that dollar is loaned out in the form of new money and that all banks have the same reserve requirement and all the banks act in the same manner.