CFA Practice Question

There are 341 practice questions for this study session.

CFA Practice Question

Suppose the banking system has $100,000 in outstanding deposits and actual reserves of $35,000. If the required reserve ratio is 25% and individuals hold no cash, the maximum amount the banking system can now add to the money supply is ______.

A. $10,000
B. $25,000
C. $40,000
Correct Answer: C

Excess reserves are $10,000 and the simple money multiplier is 4, so (10,000 x 4) = $40,000 can be added.

User Contributed Comments 10

User Comment
cbb1 Key is that the question is not the amount it can lend, but rather the impact on the money supply.
Done Would this work as well: (35,000/.25)- 100,000 = ?
danlan Agree with Done, 35000 ==> 140000 (35000/0.25) money supply, thus add 40000 (140000-100000)
robB Actual Reserve = 35,000
Required reserve (100,000 x 0.25)= $ 25,000
1/.25 = 4
4 x ( 35000-25000)= 40,000
bundy use the money multiplier form
(1+a)/(a+b) individual hold no cash so numerator is 1 denominator is .25 = 4
4 times the excess reserve = 40,000
YOUCANDOIT nice question!
just follow robB s explanation!
hoyleng thank you so much.
2014 Why money is not multiplied on outstanding deposits. I mean why cash is just 10,000. Why not 100,000 minus 25,000 reserves = 75,000.

can anyone pls explain
2014 or 10,000/.25 = 40,0000
gill15 Thanks ROb. Question if you havent taken economics in a long time you would be flipping through your notes wasting a half hour trying to figure it out. Thanks for letting me watch 30 rock tonite.
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