If a deposit of $50 in the banking system can lead to a maximum expansion in bank deposits of $250, using the money multiplier formula, the required reserve ratio must be:

Question

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The money multiplier formula is 1/required reserve ratio. If $50 leads to a maximum expansion of $250, the multiplier is 250/50 = 5. Therefore, the required reserve ratio is 1/5 = 0.20 or 20%.

If a Deposit of $50 in the Banking System Can