If the average reserve ratio in the banking system is 25% and the Fed increases bank reserves by $20,000,then the change in the money supply will be equal to $500,000.

Question

Quizplus · Accepted Answer

The change in the money supply is calculated using the money multiplier, which is 1 divided by the reserve ratio. With a reserve ratio of 25%, the multiplier is 4. Therefore, the change in the money supply would be $20,000 * 4 = $80,000, not $500,000.

If the Average Reserve Ratio in the Banking System Is