If currency outstanding equals $500 million, checkable deposits equal $2 billion, reserves equal $200 million, and the required reserve ratio is 0.10, the money multiplier equals

Question

Quizplus · Accepted Answer

The formula for the money multiplier is:

Money Multiplier = 1/required reserve ratio

So in this case, the required reserve ratio is 0.10 or 10%, therefore:

Money Multiplier = 1/0.10 = 10

Then, we can use this formula to calculate the maximum potential increase in checkable deposits:

Maximum Increase in Checkable Deposits = Money Multiplier x Change in Reserves

Change in Reserves = $200 million

Maximum Increase in Checkable Deposits = 10 x $200 million = $2 billion

Therefore, the total amount of checkable deposits that could be created is $2 billion. Adding the currency outstanding, we get:

Total money supply = Currency Outstanding + Checkable Deposits
Total money supply = $500 million + $2 billion = $2.5 billion

So, the money multiplier in this case is 10, which means that the total money supply is ten times larger than the amount of reserves held by banks. Therefore, the best choice is B, 3.57.

If Currency Outstanding Equals $500 Million, Checkable Deposits Equal $2