If a bank uses $100 of excess reserves to make a new loan when the reserve ratio is 10 percent, this action by itself initially makes the money supply
A)and wealth increase by $100.
B)and wealth decrease by $100.
C)increase by $100 while wealth does not change.
D)decrease by $100 while wealth decreases by $100.

Question

Quizplus · Accepted Answer

When excess reserves are used to make a new loan, the money supply increases by a multiple of the initial increase in reserves, which is determined by the reserve ratio. In this case, the reserve ratio is 10 percent, so the initial increase in the money supply will be 10 times the increase in reserves, or $1,000. Wealth does not change because the asset and liability sides of the bank's balance sheet have both increased by $1,000.

If a Bank Uses $100 of Excess Reserves to Make