Question

g Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $50,000. Using the simple money multiplier formula (i.e., individuals hold no cash), if the required reserve ratio is 40%, the maximum possible amount that the banking system can now add to the money supply is:Group of answer choices$15,000$20,000$25,000$40,000

Answer 1

Answer: $25,000

Explanation:

The Money Multiplier allows us to calculate how much money banks can create in an economic given a certain reserve ratio.

The formula is;

Money Multiplier = 1 /reserve ratio

= 1/ 0.4

= 2.5

The reserve ratio is 40% which means the bank should be holding 40% of deposits as reserves.

= 100,000 * 40%

= $40,000

Yet they are holding $50,000. They are holding $10,000 more than required. Should they release that $10,000 then they will create;

= 10,000 * money Multiplier

= 10,000 * 2.5

= $25,000