What you have to do to figure this out is to use the forumla for the money multiplier. The formula for the money multiplier is 1 over required reserve ratio. So in this case, that is 1/.2. That works out to 5. So the money multiplier is 5.

All you...

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What you have to do to figure this out is to use the forumla for the money multiplier. The formula for the money multiplier is 1 over required reserve ratio. So in this case, that is 1/.2. That works out to 5. So the money multiplier is 5.

All you do then is to take the money multiplier and multiply it by the amount of money that can be lent out. In this case, that is $800. You don't multiply by the whole $1,000 because not all of it can be lent ($200 must be held as required reserves). So you multiply that and you get $4,000.

So in this case, when $1,000 is deposited and $800 of that can be lent, $4,000 is created.