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-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Question

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Refer to Scenario: Assets and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Quizplus · Accepted Answer

The money multiplier is 1/reserve ratio, which is 1/0.05 = 20. If the banking system does not hold excess reserves, the entire amount of new reserves can be multiplied by the money multiplier to increase the money supply. Therefore, $50,000 in new reserves can increase the money supply by $50,000 * 20 = $1 million.

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