The multiple by which the commercial banking system can expand the supply of money is equal to
A) the ratio of actual reserves to required reserves.
B) the reciprocal of the federal funds rate.
C) the reciprocal of the reserve ratio.
D) the ratio of required reserves to actual reserves.

Question

Quizplus · Accepted Answer

The multiple by which the commercial banking system can expand the supply of money is known as the money multiplier, which is equal to the reciprocal of the reserve ratio. This is because the reserve ratio determines how much banks must hold in reserves and how much they can lend out. For example, if the reserve ratio is 10%, banks can only lend out 90% of any deposit, meaning the money supply can expand up to 10 times the initial deposit. Therefore, the money multiplier is equal to 1/reserve ratio.

The Multiple by Which the Commercial Banking System Can Expand