If the reserve requirement is 5%, households' and businesses' desired holding ratio of currency-to-deposits is .2, and the Federal Reserve increases the monetary base by $100 billion, the increase in the money supply would be
A) $400 billion.
B) $4000 billion.
C) $2400 billion.
D) $480 billion.

Question

Quizplus · Accepted Answer

The money multiplier formula in this context is 1 / (Reserve Requirement + Currency-to-Deposit Ratio * (1 - Reserve Requirement)). Plugging in the values: 1 / (0.05 + 0.2 * (1 - 0.05)) = 4.8. Therefore, a $100 billion increase in the monetary base would increase the money supply by $480 billion (4.8 * $100 billion).

If the Reserve Requirement Is 5%, Households' and Businesses' Desired