Table 9-5
Bolton Bank: Partial Balance Sheet
(All figures in $ million)

-Refer to Table 9-5. The required reserve ratio is 10%. By how much could the banking system ultimately increase the money supply if all excess reserves are loaned out, people never withdraw cash, and all loan proceeds are spent?
A) $30 million
B) $70 million
C) $300 million
D) $700 million

Question

Table 9-5
Bolton Bank: Partial Balance Sheet
(All figures in $ million)
 
-Refer to Table 9-5. The required reserve ratio is 10%. By how much could the banking system ultimately increase the money supply if all excess reserves are loaned out, people never withdraw cash, and all loan proceeds are spent?
A) $30 million 
B) $70 million 
C) $300 million 
D) $700 million

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 10% or 0.1, giving a multiplier of 10. If the banking system loans out all excess reserves, the money supply can increase by 10 times the initial excess reserves. If the initial excess reserves are $70 million, the money supply can increase by $700 million.

Table 9-5 Bolton Bank: Partial Balance Sheet