# AP Macroeconomics : How to find the effect of reserve requirements on money supply

## Example Questions

### Example Question #1 : Reserve Requirements

At a particular bank, the reserve ratio is 10% and excess reserves are $300. The maximum expansion of the money supply that can be generated by that bank is ________. Possible Answers:$30,000

$30$3000

$300 Correct answer:$3000

Explanation:

The money multiplier is equal to 1/r, where r is the reserve ratio. In this example, the money multiplier is 1/.1 = 10.

Since the bank has $300 in excess reserves, it can loan out the entire$300, which we then multiply by the money multipler to find the total expansion of the money supply:

The maximum expansion of the money supply generated by that bank is therefore $3000. If you selected$300, you may have forgotten to multiply by the money multipler.

If you selected $30, you may have multiplied by r rather than 1/r. If you selected$30,000, you may have thought that the reserve ratio was 1 percent rather than 10 percent.