Suppose the required reserve ratio is 20% and there is no currency drain. Then a $100 increase in the monetary base results in the banking system increasing the quantity of money by

BANKING GENERAL KNOWLEDGE

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Question [CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]

A	$80.
B	$400.
C	$1, 000.
D	$500.
E	$100.

Explanation:

Detailed explanation-1: -The simple money multiplier for a 20% required reserve ratio is 5. (The reciprocal of the required reserve ratio.) When that 5 is multiplied by the $800 of excess reserves available for lending the result is $4, 000 of money added to the initial $1, 000 deposit for a total potential money creation of $5, 000.

Detailed explanation-2: -If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can: decrease the money supply by up to $50 million.

Detailed explanation-3: -What happens to the money multiplier when the reserve requirement increases from 20% to 25%? It decreases from 5 to 4.

Detailed explanation-4: -A reduction in the required reserve ratio from 20% to 10% is an expansionary monetary policy because it implies that the banks are required to keep a lower proportion of the total deposits in the form of reserves, freeing up money to be given out as loans for credit creation.

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