Suppose the entire banking system has a required reserve ratio of 0.20.How much can the money supply increase in response to a $1 billion increase in excess reserves for the whole banking system?
A) $20 billion.
B) $5 billion.
C) $1 billion.
D) $200 million.

Question

Quizplus · Accepted Answer

The maximum money supply increase would be the result of the money multiplier formula, which is 1/RR. Therefore, with a required reserve ratio of 0.20, the money multiplier would be 1/0.20 = 5. This means that every $1 in excess reserves could lead to a maximum increase in the money supply of $5. Therefore, a $1 billion increase in excess reserves would result in a $5 billion increase in the money supply.

Suppose the Entire Banking System Has a Required Reserve Ratio