Suppose the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Molly deposits $1,000 cash in her checking account, the banking system can increase the money supply by:

Question

Quizplus · Accepted Answer

With a reserve ratio of 25%, the banking system can increase the money supply by four times the initial deposit. Therefore, the money supply can be increased by 4 x $1,000 = $4,000. However, Molly's deposit itself is part of the money supply, so the total increase is $4,000 + $1,000 = $5,000. Therefore, the correct answer is C.

Suppose the Banking System Does NOT Hold Excess Reserves and the Reserve