Consider the following information about a banking system: new currency deposited in the system = $40 billion, legal reserve ratio = 0.20, excess reserves prior to the currency deposit = $0. With the $40 billion deposit, the banking system will be able to expand the money supply through loans by

a. $128 billion.

b. $160 billion

c. $200 billion.

d. $40 billion.

c. $200 billion.

Explanation:

In this question, we have to apply the money multiplier formula which is shown below:

Money multiplier = (1 : legal reserve ratio)

= (1 : 0.20)

= 5

Now the money supply through loans be computed by

= Money multiplier * new currency deposited amount

= 5 * $40 million

= $200 million

For computing the money lend amount we always considered the money multiplier and the new currency deposited amount