If reserves increase by $4 million and the required reserve ratio is 8%,what is the resulting change in checkable deposits (or the money supply),assuming that there are no cash leakages and that banks hold zero excess reserves?

Question

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 1/0.08 = 12.5. Therefore, an increase in reserves of $4 million results in an increase in checkable deposits of 12.5 * $4 million = $50 million.

If Reserves Increase by $4 Million and the Required Reserve