If the reserve ratio is 10%, then a $100 increase in bank deposits can potentially lead to:
A) a decrease of $1,000 in the money supply.
B) an increase of $1,000 in the money supply.
C) a decrease of $90 in the money supply.
D) an increase of $90 in the money supply.

Question

Quizplus · Accepted Answer

The reserve ratio is the percentage of deposits banks are required to hold in reserve. With a reserve ratio of 10%, banks are required to hold $10 of every $100 deposited. This means that they can loan out $90, which will eventually be deposited somewhere else, creating a cycle of lending and depositing. As a result, a $100 increase in deposits could potentially lead to a $1,000 increase in the money supply (10 times the initial deposit).

If the Reserve Ratio Is 10%, Then a $100 Increase