If the reserve-deposit ratio is 20% and the banking system receives an additional $10 million in reserves,bank deposits will increase by
A) $4 million.
B) $10 million.
C) $50 million.
D) $250 million.
E) $400 million.

Question

Quizplus · Accepted Answer

The reserve-deposit ratio is 20%, meaning banks must keep 20% of deposits as reserves. The money multiplier is 1/0.2 = 5. Therefore, an additional $10 million in reserves can support an increase in bank deposits of $10 million * 5 = $50 million.

If the Reserve-Deposit Ratio Is 20% and the Banking System