Suppose a banking system has a required reserve ratio of 10 percent. what is the maximum possible increase in the money supply in response to a $2 billion increase in excess reserves for the whole banking system?
The maximum increase would be equal to the increase in excess reserves multiplied by the reserve ratio. In this case, that would be the $2B excess multiplied by the 10 percent (0.10) that is required in reserves. This would give a maximum money supply increase of $200 million.
