Question

QUESTION 2 A group of people in an economy have $5 million in cash. They deposit their money in a bank and it holds $0.5 million as required reserves. M1 money supply increases by through the banking system? 3. $25 million b. 545 million $5 million d. $10 million

Answer 1

Solution :-

Money Multiplier = 1 / RR = 1 / 10% = 10

Where RR = 0.50 / 5 = 10%

Initially he is holding only currency and no deposit

then M1= Currency + deposit = 5 million.

Now when he deposits all that into Bank,

Then Currency = 0 and Total Checkable deposit = Multiplier * 5 million = 10* 5 million = 50 million.

Thus Money supply should increase by 50 million - 5 million = 45 million.

Therefore Correct Answer is (B)

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