AP Macroeconomics Question 389: Answer and Explanation

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Question: 389

12. If the reserve ratio is 10 percent and a new customer deposits $500, what is the maximum amount of money created?

  • A. $500
  • B. $4,500
  • C. $5,000
  • D. $50
  • E. $5,500

Correct Answer: B

Explanation:

B-The money multiplier is 1/rr = 10. So a $500 deposit creates $450 of new excess reserves, which can multiply to $4,500 of newly created money.