Question

Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 8%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action? Include the $150 as part of the new money supply and assume the bank does not hold excess reserves. Give your answer to two decimals.

Answer 1

The largest amount by which the money supply can increase is $1,875

Step-by-step explanation:

According to the given data, we have the following:

Checking/Demand Deposit = $150 (which is assumed to be the part of new money supply)

Required reserve ratio = 8% = 0.08

Therefore, first we need to calculate the money supplier as follows:

Money multiplier 1/rr

Money multiplier = 1/0.08

Money multiplier = 12.5

Hence for $150 deposited the money supply will increase by $(150×12.5) =$1,875

The largest amount by which the money supply can increase is $1,875