Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000.If the required reserve ratio is 10% and individuals hold no cash,the maximum amount the banking system can now add to the money supply is
A) $25,000.
B) $35,000.
C) $250,000.
D) $1,000,000.
E) $1,500,000.

Question

Quizplus · Accepted Answer

The required reserves are 10% of $100,000, which is $10,000. The excess reserves are $35,000 - $10,000 = $25,000. With a reserve ratio of 10%, the money multiplier is 1/0.10 = 10. Therefore, the maximum amount that can be added to the money supply is $25,000 * 10 = $250,000.

Suppose the Banking System Has $100,000 in Outstanding Deposits and Actual