Question

If the reserve ratio is 12.5 percent, then $1,000 of additional reserves can create up to

a. $7,000 of new money.
b. $11,500 of new money.
c. $8,000 of new money.
d. $12,500 of new money.

Answer 1

Using the money multiplier formula, $1,000 of additional reserves at a reserve ratio of 12.5 percent can create up to $8,000 of new money.

option a is the correct

Step-by-step explanation:

If the reserve ratio is 12.5 percent, then $1,000 of additional reserves can create up to $8,000 of new money.

The calculation for the maximum amount of new money that can be created is based on the money multiplier formula, which in this case is the reciprocal of the reserve ratio.

To find the money multiplier, divide 1 by the reserve ratio: 1 divided by 0.125 (12.5 percent expressed as a decimal) equals 8. Then, multiply the money multiplier by the amount of the additional reserves to find the maximum new money created: 8 times $1,000 equals $8,000 of new money. Therefore, the correct answer is c. $8,000 of new money.