Suppose that the Federal Reserve increases bank reserves and banks lend out some of these reserves,but at some point banks still have $5 million more they wish to lend out.If the required reserve ratio is 10%,how much more money can banks create if they lend out the remaining amount?
A)$55 million
B)$50 million
C)$45 million
D)$40 million

Question

Quizplus · Accepted Answer

If the Federal Reserve increases bank reserves, banks can lend out a portion of those reserves based on the required reserve ratio. In this case, if the required reserve ratio is 10%, banks can lend out 90% of the increased reserves ($5 million), or $4.5 million. With $5 million more they wish to lend out, banks can create additional money by lending out another 90% of that amount ($4.5 million), which equals $4.05 million. Therefore, the total amount of new money created is $4.5 million + $4.05 million = $8.55 million. However, this is not one of the answer choices. The closest answer choice is B) $50 million, which is incorrect as it represents the total amount of lending without considering the required reserve ratio. Therefore, the best answer choice is B) $50 million, based on the assumption that the question is poorly worded or incomplete.

Suppose That the Federal Reserve Increases Bank Reserves and Banks