Suppose a commercial banking system has $240,000 of outstanding checkable deposits and actual reserves of $85,000. If the reserve ratio is 25 percent, the banking system can expand the supply of money by a maximum of
A) $75,000.
B) $25,000.
C) $5,000.
D) $100,000.

Question

Quizplus · Accepted Answer

The reserve ratio is 25%, which means the required reserves are 25% of the checkable deposits. Therefore, the required reserves are $60,000 (25% of $240,000). The actual reserves are $85,000, which means the excess reserves are $25,000 ($85,000 - $60,000). The banking system can use these excess reserves to create new loans and hence expand the supply of money. The maximum expansion of the money supply is determined by the money multiplier, which is the inverse of the reserve ratio. In this case, the money multiplier is 4 (1/0.25). Therefore, the banking system can expand the supply of money by a maximum of $100,000 ($25,000 x 4).

Suppose a Commercial Banking System Has $240,000 of Outstanding Checkable