AP Macroeconomics Question 343: Answer and Explanation
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2. If a bank has $1,000 in checking deposits and the bank is required to reserve $250, what is the reserve ratio? How much does the bank have in excess reserves? What is the size of the money multiplier?
- A. 25%, $750, M = ¼
- B. 75%, $250, M = 4
- C. 25%, $750, M = 4
- D. 75%, $750, M = ¼
- E. 25%, $250, M = 4
Correct Answer: C
C-The reserve ratio is required reserves divided by deposits, so rr = 0.25. With $250 in required reserves, excess reserves are $750. The money multiplier is equal to 1/rr = 4.