Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $625. Assume also that no banks hold excess reserves and that the entire money supply consists of bank deposits. If, at a point in time, reserves for all banks amount to $500, then at that same point in time, loans for all banks amount to $2,625.

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Quizplus · Accepted Answer

The money multiplier is 6.25 (since $100 in reserves leads to a $625 increase in money supply). With $500 in reserves, the total money supply is $500 * 6.25 = $3,125. Since the entire money supply consists of deposits, and reserves are $500, loans are $3,125 - $500 = $2,625.

Assume That When $100 of New Reserves Enter the Banking