If the reserve requirement is 25%, a new deposit of $1,000 leads to a potential increase in the money supply of
A) $250.
B) $4,000.
C) $5,000.
D) $10,000.

Question

Quizplus · Accepted Answer

The potential increase in the money supply due to a new deposit can be calculated using the money multiplier formula, which is 1/reserve requirement. With a 25% reserve requirement, the multiplier is 1/0.25 = 4. Therefore, a new deposit of $1,000 can potentially increase the money supply by $1,000 * 4 = $4,000.

If the Reserve Requirement Is 25%, a New Deposit of $1,000