Suppose that the reserve ratio is 20%.If Holly deposits $1 000 of cash in her chequing account and the bank lends $600 to Freda,the money supply:

Question

Quizplus · Accepted Answer

When Holly deposits $1,000 in her chequing account, the bank is required to hold on to 20% of it ($200) as reserves and can lend out the remaining 80% ($800) to Freda.

Since the bank is making a loan of $600 to Freda, it will have $200 in reserves and $600 in loans on its balance sheet.

The money supply will increase by the amount of the loan, which is $600. Therefore, the correct answer is D) increases by $600.

Suppose That the Reserve Ratio Is 20