If Bank A has excess reserves of $1 million and all other banks in the system do not have any excess reserves, then the amount of additional loans that can be made by the banking system will be
A) $1 million also.
B) a fraction of $1 million.
C) a multiple of $1 million.
D) $1 million times the required reserve ratio.

Question

Quizplus · Accepted Answer

The banking system can create loans amounting to a multiple of Bank A's excess reserves due to the money multiplier effect. When Bank A lends out its excess reserves, the money deposited by borrowers into other banks increases those banks' reserves, allowing them to lend further, thus multiplying the initial amount of excess reserves throughout the banking system.

If Bank a Has Excess Reserves of $1 Million and All