Question

If the target reserve ratio in the banking system is 20%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will fead to an eventual expansion of the money supply of Select one:

A. $200
B. $5.00
C. 50.20
D. $1.20
E. $20.00

Answer 1

If the target reserve ratio is 20% and there are no cash drain or excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply to $5.00.

Step-by-step explanation:

If the target reserve ratio in the banking system is 20%, there is no cash drain, and there are no excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply of $5.00. If the target reserve ratio is 20% and there are no cash drain or excess reserves, a new deposit of $1 will lead to an eventual expansion of the money supply to $5.00.

This can be calculated using the money multiplier formula: Money Multiplier = 1 / Reserve Ratio. In this case, the reserve ratio is 20%, so the money multiplier is 1 / 0.2 = 5. Therefore, the initial $1 deposit will eventually lead to a total money supply of $1 * 5 = $5.