If bank reserves are 200, the public holds 400 in currency, and the desired reserve-deposit ratio is 0.25, the deposits are ________ and the money supply is ________.

Question

Quizplus · Accepted Answer

Bank reserves multiplied by the money multiplier, which is the reciprocal of the desired reserve-deposit ratio, gives deposits. In this case, that is 200 × (1/0.25)= 800. To get the money supply, add the currency held by the public to arrive at the total of 1,200.

If Bank Reserves Are 200, the Public Holds 400 in Currency