Use the following to answer questions 3-5: Use this scenario to answer questions

Question

Use the following to answer questions 3-5: Use this scenario to answer questions 124-128. Scenario: Money Creation The reserve requirement is 20%. and Leroy deposits his $1.000 check received as a graduation gift in his checking account. The bank does NOT want to hold excess reserves. (Scenario. Money Creation) How much of the deposit is the bank required to keep in reserves? $1. 000 $100 $200 $8004. (Scenario. Money Creation) How much can the bank loan based on the $1,000 deposit? $1,000 $200 $800 $0 (Scenario. Money Creation) what is the maximum expansion in the money supply possible? $1,000 $1,800 $4,000 $5,000

Explanation / Answer

3. As the reserve requirement is 20%, the bank is required to hold 20% * 1000 = $200 C. $200

4. Amount that can be loaned out of this $1000 deposit = $1000 - Reserve requirement = $1000 - $200 = C. $800

5. Maximum expansion possible = Initial Deposit * Money Multiplier

Money Multiplier = 1/Reserves Ratio = 1/0.20 = 5

Maximum expansion possible = 1000 * 5 = D. $5000

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