Suppose Brenda accepts a loan of $10,000 and deposits the money in her checking account. If the required reserve ratio is 10 percent, and if banks loan out all of their reserves, then what is the maximum increase in the money supply after the multiplier effect has fully operated?
A) $1,000.
B) $10,000.
C) $90,000.
D) $1,000,000.

Question

Quizplus · Accepted Answer

The maximum increase in the money supply is determined by using the money multiplier formula: 1/required reserve ratio. In this case, the required reserve ratio is 10% or 0.1, so the money multiplier is 1/0.1 = 10. This means that the initial deposit of $10,000 can potentially result in a maximum increase in the money supply of $10,000 x 10 = $90,000.

Suppose Brenda Accepts a Loan of $10,000 and Deposits the Money