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

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

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!