Table 16-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below.
-Refer to Table 16-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
A)$866.67.
B)$1,666.67.
C)$2,000.00.
D)an infinite amount.

Question

Table 16-2. An economy starts with $10,000 in currency. All of this currency is deposited into a single bank, and the bank then makes loans totaling $9,250. The T-account of the bank is shown below. 
-Refer to Table 16-2. If all banks in the economy have the same reserve ratio as this bank, then an increase in reserves of $150 for this bank has the potential to increase deposits for all banks by
A)$866.67. 
B)$1,666.67. 
C)$2,000.00. 
D)an infinite amount.

Quizplus · Accepted Answer

The potential increase in deposits is calculated using the money multiplier, which is the reciprocal of the reserve ratio. If the reserve ratio is 0.075 (7.5%), the money multiplier is 1/0.075 = 13.33. Therefore, an increase in reserves of $150 can increase deposits by $150 * 13.33 = $2,000.00.