The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is equal to
A) the reciprocal of the required reserve ratio.
B) 1 minus the required reserve ratio.
C) the reciprocal of the income velocity of money.
D) 1/MPS.

Question

Quizplus · Accepted Answer

The multiple by which the commercial banking system can increase the supply of money on the basis of each dollar of excess reserves is known as the money multiplier. The formula for the money multiplier is 1/rr, where rr is the required reserve ratio. This means that for every dollar of excess reserves held by banks, they can create a multiple of that amount in the money supply, based on the reserve ratio set by the central bank.

The Multiple by Which the Commercial Banking System Can Increase