If an increase of $5 million in excess reserves increases checkable deposits in the banking system by a maximum of $50 million, the required reserve ratio would be _____

Question

Quizplus · Accepted Answer

The required reserve ratio is the percentage of deposits that banks must hold in reserve. If an increase of $5 million in excess reserves leads to a maximum increase of $50 million in checkable deposits, then the money multiplier is 10 ($50 million / $5 million). This means that for every $1 of excess reserves held by banks, they can create up to $10 in new checkable deposits.

Using the formula for the money multiplier:

Money multiplier = 1 / Required reserve ratio

We can find that the required reserve ratio is 10 percent (0.1 = 1 / 10%). Therefore, choice C) 10 percent is the correct answer.

If an Increase of $5 Million in Excess Reserves Increases