Suppose the reserve ratio is 20% for all banks. If the Fed increases bank reserves by $200, then the money supply will:
A) decrease by $400.
B) increase by $400.
C) decrease by $1,000.
D) increase by $1,000.

Question

Quizplus · Accepted Answer

According to the reserve ratio of 20%, $200 increase in bank reserves will allow banks to create new loans of $1000 ($200/0.20). This means the money supply will increase by $1000.

Suppose the Reserve Ratio Is 20% for All Banks