Use the following to answer questions:
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Question

Use the following to answer questions: 
-(Scenario: Assets and Liabilities of the Banking System) Look at the scenario Assets and Liabilities of the Banking System. If the reserve ratio is 5% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Quizplus · Accepted Answer

The reserve ratio of 5% means banks must hold $5 in reserves for every $100 deposited. If banks do not hold excess reserves, they can lend out 95% of deposits. The money multiplier is 1/0.05 = 20. Therefore, $50,000 in new reserves can support $1 million in new money supply (20 times $50,000).

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