Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If the required reserve ratio is 25 percent, the maximum amount the banking system can now add to the money supply is:

Question

Quizplus · Accepted Answer

The required reserves are 25% of $100,000, which is $25,000. The bank has $35,000 in actual reserves, so it has $10,000 in excess reserves. With a reserve ratio of 25%, the money multiplier is 4 (1/0.25). Therefore, the maximum amount the banking system can add to the money supply is $10,000 * 4 = $40,000.

Suppose the Banking System Has $100,000 in Outstanding Deposits and Actual