Question

Imagine that Kristy deposits​ \$10,000 of currency into her checking account deposit at Bank A and...

Imagine that Kristy deposits​ \$10,000 of currency into her checking account deposit at Bank A and that the required reserve ratio is​ 20%.

Refer to the scenario above. If the required reserve ratio is 10​ percent, an increase in bank reserves of​ \$1,000 can support an increase in checking account deposits​(including the original​ deposit) in the banking system as a whole of up to

A.

​\$100.

B.

​\$10,000.

C.

​\$1,000.

D.

​\$100,000.

Required reserve ratio = 10% or 0.10

Calculate the value of money multiplier -

Money multiplier = 1/Required reserve ratio

Money multiplier = 1/0.10 = 10

The value of money multiplier is 10.

Increase in bank reserves = \$1,000

Calculate the increase in checking account deposit in the banking system as a whole -

Increase in checking account deposit = Increase in bank reserves * Money multiplier

Increase in checking account deposit = \$1,000 * 10 = \$10,000

The checking account deposit in the banking system as a whole will increase by \$10,000.

Hence, the correct answer is the option (B).