If the reserve ratio is 5 percent, then $2,500 of additional reserves can create up to
A)$62,500 of new money.
B)$50,000 of new money.
C)$45,600 of new money.
D)$37,500 of new money.

Question

Quizplus · Accepted Answer

If the reserve ratio is 5 percent, then the money multiplier will be 1/0.05 = 20. Thus, $2,500 of additional reserves can create up to $50,000 of new money ($2,500 x 20 = $50,000). Therefore, option B is the correct choice.

If the Reserve Ratio Is 5 Percent, Then $2,500 of Additional