If total reserves for a bank are $200,000,excess reserves are zero,and demand deposits are $1,000,000,then the money multiplier must be:
A) 5.
B) 10.
C) 15.
D) 20

Question

Quizplus · Accepted Answer

The money multiplier is the inverse of the reserve requirement ratio (RRR). If excess reserves are zero, the bank is holding the required reserves and has no excess reserves to lend out. Therefore, the RRR is 20% (required reserves of $200,000 divided by demand deposits of $1,000,000). The inverse of 20% is 1/0.2 = 5. Thus, the money multiplier is 5.

If Total Reserves for a Bank Are $200,000,excess Reserves Are