Suppose Fed's purchase of government bonds results in a $120, 000 increase in the excess reserves of a particular bank.What would be the applicable reserve requirement for the whole banking system to be able to expand the money supply by $600, 000?
A)10 percent
B)12 percent
C)16 percent
D)20 percent
E)25 percent

Question

Quizplus · Accepted Answer

The money multiplier is the reciprocal of the reserve requirement. Thus, to calculate the reserve requirement needed to expand the money supply by $600,000, we divide the potential money supply by the increase in reserves:

Money multiplier = 1/RR
$600,000 = (1/RR) x $120,000
RR = 20%

So the reserve requirement for the banking system would need to be 20% in order to expand the money supply by $600,000. Therefore, the answer is D) 20 percent.

Suppose Fed's Purchase of Government Bonds Results in a $120