If excess reserves in the depository institutions system increase by $16 million and the reserve requirement is 20 percent, the maximum amount by which the money supply can increase is:
A) $3.2 million.
B) $12.8 million.
C) $19.2 million.
D) $80.0 million.

Question

Quizplus · Accepted Answer

The maximum increase in the money supply is determined by the money multiplier, which is the reciprocal of the reserve requirement. With a 20% reserve requirement, the money multiplier is 1/0.20 = 5. Therefore, if excess reserves increase by $16 million, the maximum increase in the money supply is $16 million * 5 = $80 million.

If Excess Reserves in the Depository Institutions System Increase by $16