Answer the question on the basis of the following information about a banking system: new currency deposited in the system = $40 billion;legal reserve ratio = 0.20;excess reserves prior to the currency deposit = $0. Refer to the information.With the $40 billion deposit,the banking system will be able to expand the money supply through loans by:
A) $160 billion.
B) $200 billion.
C) $40 billion.
D) $128 billion.

Question

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio (1/0.20 = 5). The potential increase in the money supply is the deposit multiplied by the money multiplier ($40 billion * 5 = $200 billion). However, $40 billion is held as reserves, so the expansion through loans is $200 billion - $40 billion = $160 billion.

Answer the Question on the Basis of the Following Information