If the reserve ratio is 5 percent,$1,000 of additional reserves can create
A)$25,000 of new money.
B)$20,000 of new money.
C)$19,000 of new money.
D)$15,000 of new money.

Question

Quizplus · Accepted Answer

The money multiplier is determined by the reciprocal of the reserve ratio. 
Money multiplier=1/reserve ratio=1/0.05=20

The formula for calculating the potential change in the money supply is:
Change in money supply = Change in reserves x Money multiplier

Therefore, $1,000 of additional reserves can create: 
$1,000 x 20 = $20,000 of new money.

Thus, the correct answer is B.

If the Reserve Ratio Is 5 Percent,$1,000 of Additional Reserves