If the banking system has $50 billion in excess reserves, and the required reserve ratio is 25 percent, what is the maximum amount by which the money supply can be increased?
A) $250 billion
B) $200 billion
C) $50 billion
D) $25 billion

Question

Quizplus · Accepted Answer

The maximum potential increase in the money supply is calculated by dividing the excess reserves by the required reserve ratio. Using the values given in the question, dividing $50 billion by 25% (or 0.25) yields a maximum potential increase in the money supply of $200 billion. Therefore, the correct answer is B.

If the Banking System Has $50 Billion in Excess Reserves