While cleaning your apartment, you find a $50 bill under the sofa cushion. You d
ID: 1201212 • Letter: W
Question
While cleaning your apartment, you find a $50 bill under the sofa cushion. You deposit the $50 into your checking account. If the reserve requirement is 20%, what is the maximum amount that the money supply could ultimately increase? (Remember that the money supply is Currency + Deposits - and that the amount of Currency fell by $50 when you put the cash in the bank). The change in currency would be and the maximum ultimate change in deposits would be, so the money supply would rise by. Suppose you deposit the $50, but the bank chooses not to lend any of its excess reserves. By how much would the money supply ultimately increase in this case? The change in currency would be and the maximum ultimate change in deposits would be, so the money supply would rise by. Do not use dollar signs, decimal points, or commas - but DO use minus signs when appropriate.Explanation / Answer
If the reserve requirement is 20% then R=0.2
If banks hold no excess reserves, then money multiplier = 1/R
= 1/0.2 = 5
The maximum possible increase in deposits is
5 x 50 = 250
But money supply also includes currency,which falls by $50.
Hence, max increase in money supply = $200
What is the minimum amount that the money supply could increase?
If your bank makes no loans from your deposit, currency falls by
$50, deposits increase by $50, money supply remains unchanged.
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