Question

Suppose that the banking system has $100,000 in total deposits and actual reserves on hand in the amount of $35,000. If the legally required reserve ratio is 20 percent, the maximum amount the banking system can add to the money supply is:

Answer 1

Answer:

$75,000

Explanation:

If the legally required reserve ratio is 20%, then the money multiplier = 1 / 20% = 5.

Since the bank's excess reserves are $15,000 (= $35,000 - $20,000), the total amount of money it can add to the money supply = excess reserves times money multiplier = $15,000 x 5 = $75,000