Assume a simplified banking system subject to a 10 percent required reserve ratio. If there is an initial increase in excess reserves of $90,000 and all possible loans are made, the money supply:
A) increases $90,000.
B) increases $900,000.
C) increases $990,000.
D) decreases $90,000.

Question

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 1/0.10 = 10. Therefore, an initial increase in excess reserves of $90,000 can increase the money supply by $90,000 * 10 = $900,000.

Assume a Simplified Banking System Subject to a 10 Percent