If someone deposits $10,000 into a savings account and the amount of money in the economy increases by $40,000, what is the size of the reserve requirement?

Question

Quizplus · Accepted Answer

The reserve requirement is the percentage of deposits that banks are required to hold in reserve as cash or deposits with the central bank. One way to calculate the reserve requirement is to use the money multiplier formula:

Money multiplier = 1 / Reserve requirement

If the amount of money in the economy increases by $40,000 as a result of a $10,000 deposit, then the money multiplier must be 4:

$40,000 / $10,000 = 4

So, we can solve for the reserve requirement:

Money multiplier = 1 / Reserve requirement

4 = 1 / Reserve requirement

Reserve requirement = 1 / 4 = 0.25 or 25%

Thus, the answer is B.

If Someone Deposits $10,000 into a Savings Account and the Amount