$5 million is the maximum change in deposits in the banking system.
Demand deposit growth is limited by the equation ADD = AER/r, which also provides the maximum growth rate. Demand deposit growth (ADD), excess reserves (AER) in the banking system, and required reserve ratio (RRR) are all related terms.
We have to find the deposit maximum change in the banking system which results from withdrawal. The formula to find this is given below,
Change in deposits to be checkable = change in reserves in excess×[tex]\frac{1}{r}[/tex]
r is the reserve requirement or reserve ratio and is given by 20%,
20%= [tex]\frac{20}{100}[/tex]
=0.2
Change in reserves in excess is the withdrawal amount given as $ 1 million.
Therefore, the change in deposits can be calculated as,
1 million×[tex]\frac{1}{0.2}[/tex]
=1×5
=5
Therefore, in the particular banking system, the maximum change in deposits can be $5 million.
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