Assume the Federal Reserve injects $10 billion of new excess reserves into the depository institutions system. If the reserve requirement is 20 percent, how much new money could be created by this action?
A) $5 billion.
B) $50 billion.
C) $5.5 billion.
D) $500 billion.

Question

Quizplus · Accepted Answer

The new money created can be calculated using the money multiplier formula, which is 1/reserve requirement. With a 20% reserve requirement, the multiplier is 1/0.20 = 5. Therefore, $10 billion of new excess reserves could potentially create $10 billion * 5 = $50 billion of new money.

Assume the Federal Reserve Injects $10 Billion of New Excess