If the reserve ratio is 12.5 percent,$1,000 of additional reserves can create
A)$7,000 of new money.
B)$8,000 of new money.
C)$11,500 of new money.
D)$12,500 of new money.

Question

Quizplus · Accepted Answer

The money multiplier formula is 1/reserve ratio. Therefore, 1/0.125=8. With $1,000 of additional reserves, the maximum new money that can be created is $8,000 (8x$1,000). Choice B is the closest option to this maximum value.

If the Reserve Ratio Is 12