If a bank uses $200 of excess reserves to make a new loan when the reserve ratio is 15 percent,this action by itself initially makes the money supply
A)and wealth increase by $200.
B)and wealth decrease by $200.
C)increase by $200 while wealth does not change.
D)decrease by $200 while wealth decreases by $200.

Question

Quizplus · Accepted Answer

When a bank uses $200 of excess reserves to make a new loan, this creates new money in the system because the money supply expands when banks make loans. The reserve ratio is 15%, which means that banks must keep 15% of deposits as reserves. This also means that banks can lend out 85% of their deposits. When the bank lends out $200, this increases the money supply by $200/.85 = $235.29. The wealth of the bank does not change, but the money supply increases by $235.29. Therefore, the correct answer is C.

If a Bank Uses $200 of Excess Reserves to Make