Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $625. Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $500, then at that same point in time, loans for all banks amount to $2,625.

Excess Reserves

The capital reserves held by a bank or financial institution in excess of what is required by regulators, providing a cushion against potential financial instability or liquidity needs.

Banking System

The network of financial institutions that provide banking services, including accepting deposits, providing loans, and managing payment systems.