Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $400,000.This bank makes a new loan of $300,000 and keeps an excess reserve of $100,000.If the required reserve ratio for all banks is 12.5 percent, the potential expansion of the money supply from this new loan is
A)$37,500.
B)$300,000.
C)$2.4 million.
D)$3.2 million.

Question

Quizplus · Accepted Answer

The potential expansion of the money supply is calculated using the money multiplier, which is 1 divided by the reserve ratio (1/0.125 = 8). The new loan of $300,000 can potentially expand the money supply by $300,000 * 8 = $2.4 million.

Only One Commercial Bank in the Banking System Has an Excess