Chapter 25, Problem 7MCQ

To determine

The correct option that gives the increase in checkable deposit if reserve ratio is 10% and excess reserve is $1000.

Answer to Problem 7MCQ

Option d is correct.

Explanation of Solution

Explanation for correct option:

d.

Increase in checkable deposits can be calculated as follows:

  $\begin{array}{c}\text{Increase in checkable deposits}=\frac{\text{Excess reserve}}{\text{reserve ratio}}\\ =\frac{\$1000}{.10}\\ =\$10,000\end{array}$

Therefore, option d is correct.

Explanation for incorrect option:

Since, it is calculation based, other options are incorrect.

Economics Concept Introduction

Money multiplier: Money multiplier can be referred as the ratio between money supply and the monetary base.

Monetary base: Monetary base refers to the sum of currency in circulation and the bank reserve. The percentage of currency in circulation is usually higher than the bank reserves.