Question

Suppose that you take $250 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 9%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action? Include the $250 as part of the new money supply and assume the bank does not hold excess reserves.

Answer 1

$2,777.5

Step-by-step explanation:

Checking/Demand Deposit = $250 (which is assumed to be the part of new money supply)

Required reserve ratio = 9% = 0.09

We, money multiplier = 1 ÷ m

where,

m = Demand deposits ÷ Required reserves

= 0.09

Money multiplier = 1 ÷ 0.09

Money multiplier = 11.11

So, for $250 deposited the money supply will increase by:

= $(250 × 11.11)

= $2,777.5