Asked by Kaylyn Masters on Jun 28, 2024
Verified
If an increase of $10 million in excess reserves increases checkable deposits in the banking system by a maximum of $200 million,the required reserve ratio is:
A) 0.
B) 5 percent.
C) 10 percent.
D) 20 percent.
E) 2 percent.
Required Reserve Ratio
The proportion of depositors' balances banks must have on hand as cash, mandated by the central bank.
Excess Reserves
The reserves held by banks that are greater than the minimum amounts required by regulators, which can be lent out or invested.
Checkable Deposits
Bank account balances that can be withdrawn on demand using checks or electronic methods.
- Familiarize oneself with the notion and the quantification of the money multiplier and its impact on the circulation of money.
- Recognize the implications of changes in the required reserve ratio on the banking system and the money supply.
Verified Answer
MS
Malak SalemJun 29, 2024
Final Answer :
B
Explanation :
The required reserve ratio can be calculated using the money multiplier formula, which is 1/required reserve ratio. Given that a $10 million increase in excess reserves leads to a $200 million increase in checkable deposits, the multiplier is 200/10 = 20. Therefore, the required reserve ratio is 1/20 = 0.05 or 5 percent.
Learning Objectives
- Familiarize oneself with the notion and the quantification of the money multiplier and its impact on the circulation of money.
- Recognize the implications of changes in the required reserve ratio on the banking system and the money supply.