Assume a simplified banking system subject to a 20 percent required reserve ratio. If there is an initial increase in excess reserves of $100,000, the money supply:
A) increases $100,000.
B) increases $500,000.
C) increases $600,000.
D) decreases $500,000.

Question

Quizplus · Accepted Answer

With a 20 percent required reserve ratio, each dollar of excess reserves can support $5 of deposits because the multiplier is 1/required reserve ratio = 1/0.20 = 5. Therefore, an initial increase in excess reserves of $100,000 can increase the money supply by $500,000.

Assume a Simplified Banking System Subject to a 20 Percent