Question

Only one commercial bank in the banking system has an excess reserve, and its excess reserve is $400,000. This bank makes a new loan of $300,000 and keeps an excess reserve of $100,000. If the required reserve ratio for all banks is 12.5 percent, the potential expansion of the money supply from this new loan is:

Multiple Choice

• $37,500

• $300,000

• $2.4 million

• $3.2 million

Answer 1

Solution:-

The money multiplier = 1 \ required reserve ratio
= 1 \ 0.125
=8

The increased money supply = 3,00,000 * 8
= 24,00,000
= 2.4 million
So the correct option (C) $2.4 Million