If there is no currency and the proceeds of all loans are deposited somewhere in the banking system and if rr denotes the reserve-deposit ratio, then the total money supply is:
A) reserves divided by rr.
B) 1/rr.
C) reserves times rr.
D) reserves divided by (1 - rr).

Question

Quizplus · Accepted Answer

The total money supply in a banking system where all proceeds of loans are deposited and there is no currency outside the banks can be calculated as the total reserves divided by the reserve-deposit ratio (rr). This is because the reserve-deposit ratio represents the fraction of deposits banks are required to keep as reserves. Therefore, dividing the total reserves by this ratio gives the total amount of deposits that can be supported by those reserves, which in this context represents the total money supply.

If There Is No Currency and the Proceeds of All