If the reserve ratio is 5 percent,$1,000 of additional reserves can create
A)$200 of new money.
B)$2,000 of new money.
C)$20,000 of new money.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

The money multiplier is the inverse of the reserve ratio. With a reserve ratio of 5%, the money multiplier is 1/0.05 = 20. Therefore, $1,000 of additional reserves can create $1,000 * 20 = $20,000 of new money.

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