If the desired reserve/deposit ratio equals 0.10, then every dollar of currency in bank reserves supports ________ of deposits and the money supply, while every dollar of currency held by the public contributes ________ to the money supply.

Question

Quizplus · Accepted Answer

Currency in bank reserves can support deposits much larger than the reserves thanks to the money multiplier. In this case the money multiplier is 10, i.e., 1/required reserve ratio, so every dollar in bank reserves supports $10 of deposits that are counted in the money supply. Currency held by the public makes a dollar-for-dollar addition to the money supply.

If the Desired Reserve/deposit Ratio Equals 0