The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of
A) the MPS.
B) its actual reserves.
C) its excess reserves.
D) the reserve ratio.

Question

Quizplus · Accepted Answer

The multiple by which the commercial banking system can expand the supply of money is determined by the reserve ratio. The reserve ratio is the fraction of deposits that commercial banks are required to hold as reserves. The reciprocal of the reserve ratio gives the multiple by which the commercial banking system can expand the money supply. For example, if the reserve ratio is 10%, the multiple by which the commercial banking system can expand the money supply is 1/0.1 = 10.

The Multiple by Which the Commercial Banking System Can Expand