Assume that the Federal Reserve sets a required reserve ratio of 20%. An individual deposits $1000 in cash into the bank. How much money will eventually be created when all banks are fully loaned out?
A) $800
B) $640
C) $4,000
D) $5,000

Question

Quizplus · Accepted Answer

The total money created is calculated using the money multiplier formula, which is 1/required reserve ratio. With a 20% reserve ratio, the multiplier is 1/0.20 = 5. Therefore, the initial deposit of $1000 can create a total of $1000 * 5 = $5000 in the banking system when all banks are fully loaned out.

Assume That the Federal Reserve Sets a Required Reserve Ratio