Question

Suppose a banking system has a required reserve ratio of 10 percent. what is the maximum possible increase in the money supply in response to a $2 billion increase in excess reserves for the whole banking system?

Answer 1

The maximum increase would be equal to the increase in excess reserves multiplied by the reserve ratio. In this case, that would be the $2B excess multiplied by the 10 percent (0.10) that is required in reserves. This would give a maximum money supply increase of $200 million.