Assume that banks do not hold excess reserves, all deposits remain in the banking system and that the required reserve ratio is 20%. If one bank obtains excess reserves of $10,000, then the maximum increase in money supply is
A) $10,000.
B) $20,000.
C) $40,000.
D) $50,000.

Question

Quizplus · Accepted Answer

The money multiplier is 1/required reserve ratio, which is 1/0.20 = 5. Therefore, the maximum increase in money supply is 5 times the excess reserves, which is 5 * $10,000 = $50,000.

Assume That Banks Do Not Hold Excess Reserves, All Deposits