If the reserve-deposit ratio is 5% and the banking system receives an additional $10 million in reserves,bank deposits will increase by
A) $4 million.
B) $10 million.
C) $40 million.
D) $200 million.
E) $400 million.

Question

Quizplus · Accepted Answer

The reserve-deposit ratio is 5%, meaning banks must keep 5% of deposits as reserves. The money multiplier is 1/0.05 = 20. Therefore, an additional $10 million in reserves can support an increase in deposits of $10 million * 20 = $200 million.

If the Reserve-Deposit Ratio Is 5% and the Banking System