The multiple by which the commercial banking system can expand the money supply is equal to the reciprocal of the
A) marginal propensity to save.
B) discount rate.
C) rate of inflation.
D) rate of unemployment.
E) legal reserve ratio.

Question

Quizplus · Accepted Answer

The multiple by which the commercial banking system can expand the money supply is determined by the legal reserve ratio set by the central bank. The reciprocal of the legal reserve ratio is the proportion of deposits that the banks can lend out, which is the multiplier for money creation. Therefore, the correct answer is E, legal reserve ratio.

The Multiple by Which the Commercial Banking System Can Expand