Suppose the desired reserve ratio is 20 percent and there is no currency drain.Then a $1 increase in the monetary base leads to the banking system to increase the quantity of money by
A)$0.02.
B)$4.
C)$5.
D)$20.
E)$2.

Question

Quizplus · Accepted Answer

The reserve ratio is the proportion of deposits that banks are required to hold as reserves. In this case, the desired reserve ratio is 20%, so for every $1 increase in the monetary base, the banking system will be able to create $5 in new money ($1/0.2 = $5). Therefore, the correct answer is (C) $5.

Suppose the Desired Reserve Ratio Is 20 Percent and There