If the reserve ratio is 10 percent,$1,000 of additional reserves can create
A)$5,000 of new money.
B)$9,000 of new money.
C)$10,000 of new money.
D)None of the above is correct.

Question

Quizplus · Accepted Answer

If the reserve ratio is 10 percent, this means that banks are required to hold 10 percent of their deposits as reserves and can lend out the rest. Therefore, $1,000 of additional reserves can support $10,000 of new loans (since banks can lend out 90 percent of deposits). This new lending creates new deposits and expands the money supply by $10,000.

If the Reserve Ratio Is 10 Percent,$1,000 of Additional Reserves