Question

8. The monetary multiplier Suppose that Ginny makes a new cash deposit of $120,000 at her bank. Suppose that the bank is required only to keep new cash reserves equal to 20%. Then the maximum amount Ginny's deposit will money supply is $ the Which of the following assumptions must hold to ensure that the money creation process initiated by Ginny's deposit reaches its potential? Check all that apply O All banks in the banking system lend all of their excess reserves. Some borrowers spend only a fraction of the borrowed funds. Some borrowers cash the newly acquired funds. All borrowers quickly spend all of their newly acquired funds.

Answer 1

ANswer
Multiplier =1/0.2
=5
the deposit increases the money supply
the maximum increase =deposit * multiplier
=120000*5
=$600000

the deposits are $600000
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Answer
Option 1 and 4
the maximum money supply increases if there is no leakages in the money supply as the public should not hold the money and banks should not hold excess reserves.