Question

If the Federal Reserve decreases the reserve rate from 5% to 2.5%, how does this affect the amount of money that would result because of fractional-reserve banking from an initial deposit into a bank of $35,000? A. It incraeses the amount by 1,400,000 B.It decreases the amount by 1,400,000 C.It decreases the amount by 700,000 D. It increases the amount by 700,000

Answer 1

The money in circulation is inversely proportional to the reserve rate, so changes from
.. 35000/5% = 700,000
to
.. 35000/2.5% = 1,400,000.

It increases the amount by 700,000, corresponding to the 4th selection.