If the average reserve ratio in the banking system is 20% and the Fed increases bank reserves by $100,000, what will be the total potential increase in the money supply?
A) $100,000
B) $120,000
C) $500,000
D) $2 million

Question

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, so 1/0.20 = 5. The total potential increase in the money supply is the increase in reserves multiplied by the money multiplier: $100,000 * 5 = $500,000.

If the Average Reserve Ratio in the Banking System Is