Suppose the Federal Reserve requires the Bank of Red Sox (the only bank in exist

Question

Suppose the Federal Reserve requires the Bank of Red Sox (the only bank in existence) to hold 10 percent of deposits as reserves. Assume the Bank of Red Sox issues all excess reserves in loans. What is the money supply after all loans have been issued? A) $5 million B) $10 million C) $20 million D) $40 million Suppose the Federal Reserve requires the Bank of Red Sox (the only bank in existence) to hold 10 percent of deposits as reserves. Assume the Bank of Red Sox issues all excess reserves in loans. What is the money supply after all loans have been issued? A) $5 million B) $10 million C) $20 million D) $40 million

Explanation / Answer

C. $20 million

Money supply = Deposits/Reserve ratio = $2 million/0.10 = $20 million

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