Assume a simplified banking system subject to a 25 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 $400,000.
C) increases $125,000.
D) decreases $500,000.

Question

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 1/0.25 = 4. Therefore, the increase in the money supply is $100,000 * 4 = $400,000.

Assume a Simplified Banking System Subject to a 25 Percent