Use the following to answer questions:
-If the reserve ratio is 25% and the money supply increases by $100 000,then the initial reserve injection by the Bank of Canada was:

Question

Use the following to answer questions: 
-If the reserve ratio is 25% and the money supply increases by $100 000,then the initial reserve injection by the Bank of Canada was:

Quizplus · Accepted Answer

The reserve ratio is the percentage of deposits that banks are required to hold in reserve. If the reserve ratio is 25%, it means that for every dollar deposited, the bank must hold 25 cents in reserve and can lend out the remaining 75 cents.

If the money supply increases by $100,000, then the initial reserve injection by the Bank of Canada would be the amount needed to back up this increase in deposits, which is the result of the banks lending out more money due to the reserve ratio.

Using the formula:

Initial reserve injection = Money supply increase / (1 - reserve ratio)
Initial reserve injection = 100,000 / (1 - 0.25)
Initial reserve injection = 100,000 / 0.75
Initial reserve injection = $133,333.33

Therefore, the closest answer is D) $25,000.

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