If the federal reserve decreases the reserve rate from 5% to 2%, how does this affect the amount of money that would result because of fractional reserve banking from an initial deposit into a bank of 2500

C.It increases the amount by $750,000

Explanation:

Here is the complete question:

If the Federal Reserve decreases the reserve rate from 5% to 2%, how does this affect the amount of money that would result because of fractional reserve banking from an initial deposit into a bank of $25,000?

A.It increases the amount by $500,000.

B.It decreases the amount by $750,000.

C.It increases the amount by $750,000.

D.It decreases the amount by $500,000

It should be noted that with a 5% reserve ratio, this means that the Fed will be able to create up to 1.05 which is 20 times the initial deposit while a 2% reserve ratio, will lead to the creation of about 50 times the initial deposit.

Therefore, decreasing the reserve ratio would result in an increase of:

50x−20x =30x,

where x=$25,000

30x = 30 × $25,000

= $750,000

It increases the amount by $750,000

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