If a bank in the economy has excess reserves of $3 million, and required reserves are 10 percent of transactions accounts under the assumptions of the simple multiplier formula, then eventually the money supply will increase by
A)−$3 million.
B)$3 million.
C)$10 million.
D)$30 million.

Question

Quizplus · Accepted Answer

The simple money multiplier is calculated as 1 divided by the reserve requirement ratio, which is 10% or 0.1 in this case. Thus, the multiplier is 10. With $3 million in excess reserves, the potential increase in the money supply is $3 million multiplied by 10, equaling $30 million.

If a Bank in the Economy Has Excess Reserves of $3