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The correct response is C. $80,000. Assume Company X deposits $100,000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 25 percent, Bank A can increase the money supply by a maximum of $80,000.
Reserve requirements are rules established by central banks that specify the minimal amount of liquid assets that a commercial bank must retain. The central bank often determines this minimum amount, also known as the commercial bank's reserve, based on a predetermined percentage of the bank's deposit liabilities. The reserve ratio is a typical name for this rate. Although there are many definitions, the cash held by the commercial bank and physically kept in the bank vault (vault cash) as well as the amount of the bank's balance in that bank's account with the central bank typically make up the commercial bank's reserves. A bank is free to keep excess reserves—a.k.a. reserves—in reserve amounts above this minimal need.
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