If the reserve ratio for all banks is 20 percent,then $100 of new reserves can generate

Question

Quizplus · Accepted Answer

The reserve ratio is the fraction of deposits that a bank is required to hold in reserves. In this case, with a reserve ratio of 20 percent, banks must hold $20 of every $100 deposited. Therefore, they can lend out $80. The initial $100 of new reserves can be used to create new loans and therefore new deposits. Since banks can lend out $80 for every $100 deposited, the initial $100 of new reserves can support $500 of new deposits ($100/0.2). This means that $500 of new money can be created in the economy. Therefore, the correct answer is C.

If the Reserve Ratio for All Banks Is 20 Percent,then