Originally, the Money Supply consisted of $3,000 cash + $5,000 deposits = $8,000

Question

Originally, the Money Supply consisted of $3,000 cash + $5,000 deposits = $8,000.

But after people deposited $1,000 of their cash into the bank and the bank expanded its lending to the maximum extent possible,

the Money Supply consisted of $2,000 in cash + $______? in deposits for a total money supply of $_______? . (Do not use dollar signs, commas, or decimal points.)

Comparing the original money supply of $8,000 with the money supply you computed above, the change in the money supply was equal to $________?.

Explanation / Answer

Initially, the Money Supply consisted of $3,000 cash + $5,000 deposits = $8,000.

But after people deposited $1,000 of their cash into the bank and the bank expanded its lending to the maximum extent possible,

the Money Supply consisted of $2,000 in cash + $6000 $  in deposits for a total money supply of $14,000

Total money supply = 2000 cash + 6000 deposit + 6000 loan

=$14,000

This is because when the people have deposited $1000 out of the total money supply $3000 available in the form of cash with the people. Then the deposit in the bank increase by $1000 and total deposit now will be $6000. But as it is given in the question, that bank can lend to the maximum extent possible, therefore bank can now lend full $6000 deposit to people and create additional money supply by $6000.

Initial money supply was $8000.

New money supply is $14,000

the change in the money supply was equal to $6000 (14,000 -8000).

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