New deposits of $1 billion are placed in a bank. The reserve requirement is 20%. How much does the money supply increase, assuming no leakages?
A) $1 billion
B) $5 billion
C) $10 billion
D) $20 billion

Question

Quizplus · Accepted Answer

The money supply increases by $5 billion because with a 20% reserve requirement, each dollar can be lent out and redeposited, creating a total of $5 for every $1 initially deposited. This is calculated using the money multiplier formula, which is 1/reserve requirement ratio = 1/0.20 = 5.

New Deposits of $1 Billion Are Placed in a Bank