If the reserve ratio is 8 percent, then an additional $1,000 of reserves can increase the money supply by as much as
A)$6,400.
B)$8,000.
C)$12,500.
D)$20,000.

Question

Quizplus · Accepted Answer

The money multiplier is the inverse of the reserve ratio, and represents the maximum amount by which the money supply can be increased by each dollar of additional reserves.

Money multiplier = 1/reserve ratio = 1/0.08 = 12.5

Therefore, an additional $1,000 of reserves can increase the money supply by as much as:

Change in money supply = money multiplier x change in reserves

Change in money supply = 12.5 x $1,000 = $12,500

Therefore, the correct answer is (C) $12,500.

If the Reserve Ratio Is 8 Percent, Then an Additional