If required reserves (RR) equals 0.2 and there are $5 million of new deposits of currency made (not transfers of deposits), what is the maximum potential impact of these deposits on the country's money supply over time?
A) $20 million
B) $8 million
C) $5 million
D) $25 million

Question

Quizplus · Accepted Answer

The money multiplier is 1/RR, which is 1/0.2 = 5. The maximum potential impact on the money supply is the initial deposit multiplied by the money multiplier: $5 million * 5 = $25 million.

If Required Reserves (RR) Equals 0