Suppose the reserve ratio is 20%. If Holly deposits $1,000 of cash in her checking account and her bank lends $600 to Freda, the money supply:

Question

Quizplus · Accepted Answer

When Holly deposits $1,000 of cash in her checking account, her bank now has an additional $1,000 in reserves. The reserve ratio is 20%, which means that the bank is required to hold $200 (20% of $1,000) in reserves and can lend out the rest. In this case, the bank lends $600 to Freda, which increases the money supply by $600. Therefore, the correct answer is D: increases by $600.

Suppose the Reserve Ratio Is 20