Suppose a chartered banking system has $100,000 of outstanding demand deposits and actual cash reserves of $35,000.If the desired reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum amount of:
A)$122,000
B)$175,000
C)$300,000
D)$75,000

Question

Quizplus · Accepted Answer

The banking system needs to hold 20% of $100,000, which is $20,000, as reserves. With $35,000 in actual reserves, they have $15,000 in excess reserves. Using the money multiplier (1/reserve ratio = 5), they can expand the money supply by $15,000 * 5 = $75,000.

Suppose a Chartered Banking System Has $100,000 of Outstanding Demand