A bank has excess reserves of $400,000 and makes a new loan for $50,000.If the bank faces a 25% required reserve ratio,by how much will the money supply increase when the loan is made?

Question

Quizplus · Accepted Answer

The money supply increases by the amount of the loan multiplied by the money multiplier. The money multiplier is 1 divided by the reserve ratio (1/0.25 = 4). Therefore, the increase in the money supply is $50,000 * 4 = $200,000.

A Bank Has Excess Reserves of $400,000 and Makes a New