If the Federal Reserve injects $150 billion into the financial system and the money supply increases by a maximum of $750 billion, what must the reserve requirement be?

Question

Quizplus · Accepted Answer

The reserve requirement must be 20% because the maximum increase in the money supply ($750 billion) divided by the initial injection ($150 billion) equals 5, which is the money multiplier. The money multiplier is the reciprocal of the reserve requirement ratio, so 1/5 = 0.20 or 20%.

If the Federal Reserve Injects $150 Billion into the Financial