Question

While Jon is walking to school one morning, a helicopter flying overhead drops a $20 bill. Not knowing how to return it, Jon keeps the money and deposits it in his bank. (No one in this economy holds currency.) If the bank keeps 20 percent of its money in reserves, what is the money multiplier and how much money will eventually be created by the banking system from Jon's $20? O A. The multiplier is 5 and $100 will ultimately be created. B. The multiplier is 2 and $40 will ultimately be created. C. The multiplier is 1.25 and $25 ill ultimately be created D. The multiplier is .20 and $400 will ultimately be created

Answer 1

Multiplier = 1/required reserve ratio = 1/20% = 5

Money eventually created = multiplier x 20 = $ 100

Option A is correct