If the banking system has $5 million in excess reserves and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?
A)$25 million
B)$20 million
C)$5 million
D)$2.5 million

Question

Quizplus · Accepted Answer

The excess reserves of $5 million can be used to create new loans, which in turn create deposits. The maximum amount of deposits that can be created is calculated as follows: $5 million excess reserves / 25% required reserve ratio = $20 million maximum amount of deposits that can be created. Therefore, the money supply can be increased by a maximum of $20 million.

If the Banking System Has $5 Million in Excess Reserves