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 6% 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 6% and the banking system does NOT want to hold excess reserves, how much more can be added to the money supply?

Quizplus · Accepted Answer

If the reserve ratio is 6%, then the maximum potential money multiplier is 1/0.06 = 16.67. If the banking system does not want to hold excess reserves, then the actual money multiplier is equal to the potential money multiplier. Therefore, the amount of new money that can be created is equal to the initial deposit multiplied by the money multiplier (1 x 16.67), which is approximately $667,000.

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