Answer: C.It increases the amount by $750,000
Step-by-step explanation:
Here is the complete question:
If the Federal Reserve decreases the reserve rate from 5% to 2%, how does this affect the amount of money that would result because of fractional reserve banking from an initial deposit into a bank of $25,000?
A.It increases the amount by $500,000.
B.It decreases the amount by $750,000.
C.It increases the amount by $750,000.
D.It decreases the amount by $500,000
It should be noted that with a 5% reserve ratio, this means that the Fed will be able to create up to 1.05 which is 20 times the initial deposit while a 2% reserve ratio, will lead to the creation of about 50 times the initial deposit.
Therefore, decreasing the reserve ratio would result in an increase of:
50x−20x =30x,
where x=$25,000
30x = 30 × $25,000
= $750,000
It increases the amount by $750,000