On a certain date the banking system had $2 billion in excess reserves.

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On a certain date the banking system had $2 billion in excess reserves.

On a certain date the banking system had $2 billion in excess reserves. The legally required reserve ratio was 12.5 percent. Potentially, if these, funds were fully loaned out, the banking system as a whole could increase the money supply by a maximum of:

A. $2 billion.

B. $2.5 billion.

C. $12.5 billion.

D. $16 billion

E. $25 billion.

business economics

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Answer 1

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Answer #1

Given excess reserves = $2billion

Reserve ratio = 12.5%

We know that money multiplier=1÷required reserve ratio =1/12.5%=8

△money supply=△reserve×money multiplier

=$2billion×8=$16billion

Their fore option is D $16billion.

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Answer 2

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On a certain date the banking system had $2 billion in excess reserves.

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