If a bank's required reserve ratio is 2.5%, an initial injection of $4,000 has the potential to increase the overall money supply by up to $160,000.

Question

Quizplus · Accepted Answer

The potential increase in the overall money supply is calculated using the money multiplier formula, which is 1/required reserve ratio. In this case, the money multiplier is 1/0.025 = 40. Therefore, the initial injection of $4,000 has the potential to increase the overall money supply by $4,000 x 40 = $160,000.

If a Bank's Required Reserve Ratio Is 2