If actual reserves in the banking system are $50,000, excess reserves are $5,000, and demand deposits are $225,000, then the money multiplier:
A)is 10.
B)is 5.
C)is 4.
D)cannot be determined from this information.

Question

Quizplus · Accepted Answer

The money multiplier is calculated as: 
Money Multiplier = 1/Required Reserve Ratio 
Where Required Reserve Ratio = Required Reserves/Demand Deposits 
In this case, Required Reserves = Actual Reserves - Excess Reserves = $50,000 - $5,000 = $45,000
Required Reserve Ratio = $45,000/$225,000 = 0.2
Therefore, Money Multiplier = 1/0.2 = 5.

If Actual Reserves in the Banking System Are $50,000, Excess