If excess reserves in the depository institutions system are increased by $10 million and the reserve requirement is 10 percent, then the total money supply could increase by up to:
A) $1 million.
B) $10 million.
C) $100 million.
D) cannot determine with available information.

Question

Quizplus · Accepted Answer

The total money supply could increase by up to $100 million because with a 10 percent reserve requirement, every dollar of excess reserves can support up to $10 of new deposits throughout the banking system (1/0.10 = 10). Therefore, $10 million in excess reserves could support up to $100 million in new money creation through the money multiplier effect.

If Excess Reserves in the Depository Institutions System Are Increased