Assume that individuals hold no cash and banks hold no excess reserves. If the reserve requirement on banks is 10 percent, then a $1 increase in excess reserves will lead to a _____ increase in the money supply.

Question

Quizplus · Accepted Answer

The correct answer is B) $10. This is because with a 10 percent reserve requirement, each dollar of excess reserves can support $10 of new deposits through the money multiplier effect. The money multiplier is the reciprocal of the reserve requirement (1/0.10 = 10), indicating that for every $1 of excess reserves, the banking system can expand the money supply by $10 through lending.

Assume That Individuals Hold No Cash and Banks Hold No