Assume a required reserve ratio of .25 and a discount rate of .05. If excess reserves rise by $20, demand deposits can expand by a maximum of

Question

Quizplus · Accepted Answer

The maximum potential money creation is determined by the money multiplier, which is the reciprocal of the required reserve ratio. The money multiplier in this case is 1/0.25 = 4. Therefore, the maximum potential increase in demand deposits is 4 times the increase in excess reserves, which is $20 x 4 = $80.

Assume a Required Reserve Ratio of