Assume that when $100 of new reserves enter the banking system, the money supply ultimately increases by $800. 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 $750, then at that same point in time, loans for all banks amount to $6,000.

Question

Quizplus · Accepted Answer

The money multiplier is 8 ($800/$100), so with $750 in reserves, the money supply should be $6,000 ($750 * 8), which includes both loans and reserves. Therefore, loans cannot be $6,000 alone.

Assume That When $100 of New Reserves Enter the Banking