Suppose you found $1,000 hidden in your mattress and deposited it in a demand deposit account at your bank
Suppose you found $1,000 hidden in your mattress and deposited it in a demand deposit account at your bank. If the reserve requirement was 20 percent, the deposit would directly create in excess reserves and ultimately lead to a total increase in the money supply, if all banks in the system lend out 100 percent of their excess reserves.
A. $800 ; $4,000
B. $800 ; $5,000
C. $1,000 ; $4,000
D. $1,000 ; $5,000
Homework Answers
Deposit in demand deposit = $1,000
Reserve Requirement = 20%
Calculate the money multiplier
Money multiplier = 1 ÷ Reserve Requirement
Money multiplier = 1 ÷ 20% = 5
Excess reserve will be = Deposit – Reserve
Excess reserve will be = $1,000 – 20% of $1,000 = $800
Increase in money supply = Excess Reserve * Money Multiplier
Increase in money supply = Excess Reserve * Money Multiplier
Increase in money supply = $800* 5 = $4,000
Answer – A. $800; $4,000
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