The maximum amount by which the money supply can change following an initial change in excess reserves in the depository institutions system can be determined by calculating:
A) the initial change in excess reserves x money multiplier.
B) the initial change in excess reserves/reserve requirement.
C) both of the above.
D) none of the above.

Question

Quizplus · Accepted Answer

Both A and B are correct methods for determining the maximum change in the money supply following an initial change in excess reserves. The money multiplier (1/reserve requirement) is used in method A to calculate the potential maximum expansion of the money supply. Method B directly uses the reserve requirement to find the initial change's impact on the money supply, essentially outlining the same process in a different format.

The Maximum Amount by Which the Money Supply Can Change