Suppose a commercial banking system has $100,000 of outstanding checkable deposits and actual reserves of $35,000. If the reserve ratio is 20 percent, the banking system can expand the supply of money by the maximum
Amount of
A) $122,000.
B) $175,000.
C) $300,000.
D) $75,000.

Question

Quizplus · Accepted Answer

The reserve requirement is 20% of $100,000, which is $20,000. The bank has $35,000 in actual reserves, so it has excess reserves of $15,000. With a reserve ratio of 20%, the money multiplier is 5 (1/0.20). Therefore, the banking system can expand the money supply by $15,000 * 5 = $75,000.

Suppose a Commercial Banking System Has $100,000 of Outstanding Checkable