If bank reserves are 200, the public holds 400 in currency, and the desired reserve/deposit ratio is 0.20, 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 × (1/0.2) = 1,000. To get the money supply, add the currency held by the public (200) to arrive at the total of 1,400.

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