If the reserve requirement were 5 percent, an initial $25 million increase in excess reserves in the depository institutions system could lead to an increase in the money supply of:
A) $1.25 million.
B) $20 million.
C) $125 million.
D) $500 million.

Question

Quizplus · Accepted Answer

The money multiplier is the inverse of the reserve requirement ratio. With a 5% reserve requirement, the money multiplier is 1/0.05 = 20. Therefore, an initial $25 million increase in excess reserves can lead to an increase in the money supply of $25 million * 20 = $500 million.

If the Reserve Requirement Were 5 Percent, an Initial $25