If the reserve requirement is 5% and the Federal Reserve increases the reserves in the banking system by $20 billion, the potential increase in the money supply is
A) $4 billion.
B) $40 billion.
C) $400 billion.
D) $4000 billion.

Question

Quizplus · Accepted Answer

The potential increase in the money supply can be calculated using the money multiplier formula, which is 1/reserve requirement. With a 5% reserve requirement, the multiplier is 1/0.05 = 20. Therefore, if the Federal Reserve increases reserves by $20 billion, the potential increase in the money supply is 20 times that, or $400 billion.

If the Reserve Requirement Is 5% and the Federal Reserve