Question

If the Fed supply 20 billion dollars into the commercial banking system, how much more money the commercial banks create and supply?

Answer 1

Depends on the reserve ratio, which in turn determines the money multiplier.

Step-by-step explanation:

The money multiplier formula = 1 / reserve ratio

For example, if the reserve ratio is 10%, the money multiplier will be 10. If the reserve ratio is 20%, the money multiplier will be 5.

To calculate the total effect of a $20 billion inflow, you must multiply that amount by the money multiplier:

E.g. $20 billion x 10 = $200 billion, or $20 billion x 5 = $100 billion