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14 November, 19:26

g Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $50,000. Using the simple money multiplier formula (i. e., individuals hold no cash), if the required reserve ratio is 40%, the maximum possible amount that the banking system can now add to the money supply is:Group of answer choices$15,000$20,000$25,000$40,000

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  1. 14 November, 19:38
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    Answer: $25,000

    Explanation:

    The Money Multiplier allows us to calculate how much money banks can create in an economic given a certain reserve ratio.

    The formula is;

    Money Multiplier = 1 / reserve ratio

    = 1 / 0.4

    = 2.5

    The reserve ratio is 40% which means the bank should be holding 40% of deposits as reserves.

    = 100,000 * 40%

    = $40,000

    Yet they are holding $50,000. They are holding $10,000 more than required. Should they release that $10,000 then they will create;

    = 10,000 * money Multiplier

    = 10,000 * 2.5

    = $25,000
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