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.

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.

anonymous · Answer

With a 5% reserve ratio, the Fed can create up to $\dfrac{1}{.05}=20$ times the initial deposit.

With a 2% reserve ratio, it can create up to $\dfrac{1}{.02}=50$ times the initial deposit.

So $lowering$ the reserve ratio would $increase$ the amount of money made.

$50x-20x=30x$, where $x=$25,000$.