The multiple by which the commercial banking system can expand the supply of money is equal to:
A) The ratio of actual reserves to required reserves
B) The reciprocal of the federal funds rate
C) The reciprocal of the reserve ratio
D) The ratio of required reserves to actual reserves

Question

Quizplus · Accepted Answer

The multiple by which the commercial banking system can expand the supply of money is equal to the reciprocal of the reserve ratio, also known as the money multiplier. In other words, if the reserve ratio is 10%, then the multiplier would be 1/0.1 or 10. This means that for every $1 deposited in the bank, the bank can lend out $10. Therefore, the reserve ratio determines how much the money supply can be expanded through the banking system.

The Multiple by Which the Commercial Banking System Can Expand