Suppose a banking system has a required reserve ratio of 0.10.How much can the money supply increase in response to a $500 increase in excess reserves for the whole banking system?

Question

Quizplus · Accepted Answer

The money supply can increase by the money multiplier, which is the inverse of the reserve ratio. With a reserve ratio of 0.10, the money multiplier is 1/0.10 = 10. Therefore, a $500 increase in excess reserves can increase the money supply by $500 * 10 = $5,000.

Suppose a Banking System Has a Required Reserve Ratio of 0.10.How