If the reserve ratio is 25% and the money supply increases by $100,000, then the initial reserve injection by Federal Reserve was:

Question

Quizplus · Accepted Answer

The reserve ratio is the percentage of deposits that banks are required to hold in reserve by the Federal Reserve. In this case, the reserve ratio is 25%, which means that banks are required to hold 25% of their deposits in reserve and can lend out the other 75%.

If the money supply increases by $100,000, then the initial reserve injection by the Federal Reserve would be the amount needed to cover the 25% reserve requirement on that increase in deposits.

To calculate this, we can use the reserve ratio formula:

Reserves = Reserve Ratio x Deposits

Reserves = 0.25 x $100,000

Reserves = $25,000

Therefore, the initial reserve injection by Federal Reserve was $25,000.

If the Reserve Ratio Is 25% and the Money Supply