Question

1. Assume the reserve requirement is 10%. First National Bank receives a deposit of $5,400. If there is no slippage, how much could the money supply expand? Explain and show your work. (3 points for correct math. 7 points for analysis)

Answer 1

Answer: Money supply will increase by $54,000

Step-by-step explanation:

Required reserve ration or r= 10% = 0.10

Initial deposits = $5400

We use the money multiplier formula to find out the value of the multiplier. It is given by,

`m=(1)/(r) =(1)/(0.10) =10`

Money multiplier shows us how much does the supply of money change for a change in the deposits. So, using the value of the multiplier = 10, we have change in money supply of,

`m=(Change in Money supply)/(Change in deposits)`

`10=(Change in money supply)/($5400)`

`Change in money supply = $5400*10=$54,000`

Thus, the money supply in the economy will increase by $54,000