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Exhibit: Reserves, Loans, and Money

-(Exhibit: Reserves, Loans, and Money) The required reserve ratio is 10%. By how much could the banking system ultimately increase the money supply if all excess reserves are loaned out, people never withdraw cash, and all loan proceeds are spent?
A) $30 million
B) $70 million
C) $300 million
D) $700 million

Question

Use the following to answer questions .
Exhibit: Reserves, Loans, and Money
 
-(Exhibit: Reserves, Loans, and Money) The required reserve ratio is 10%. By how much could the banking system ultimately increase the money supply if all excess reserves are loaned out, people never withdraw cash, and all loan proceeds are spent?
A) $30 million 
B) $70 million 
C) $300 million 
D) $700 million

Quizplus · Accepted Answer

The formula for determining the potential increase in the money supply is: (Excess Reserves / Reserve Requirement) x Money Multiplier. In this case, the excess reserves are $700 million ($800 million in reserves - $100 million in required reserves), the reserve requirement is 10%, and the money multiplier is 10 (1 / reserve requirement). Plugging these values into the formula, we get: ($700 million / 10%) x 10 = $7 billion. Therefore, the banking system could ultimately increase the money supply by $7 billion if all excess reserves are loaned out, people never withdraw cash, and all loan proceeds are spent.

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