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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 6% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

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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 6% 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 formula is 1/reserve ratio. With a 6% reserve ratio, the multiplier is 1/0.06 = 16.67. If banks do not want to hold excess reserves, every dollar of reserves can support $16.67 in deposits. For an initial increase in reserves, the maximum addition to the money supply is the increase in reserves times the multiplier. Without the specific increase in reserves provided, we cannot calculate the exact amount, but option A suggests a typical scenario where an initial reserve increase leads to a larger increase in the money supply through the multiplier effect.

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