Question

If the required reserve ratio is 100%, by how much can the money supply increase if $1,000 in cash is taken from under your mattress and deposited in a bank?

A. $1,000

B. $5,000

C. $0

D. $10,000

E. $4,000

Answer 1

Answer - $0

Reason - If you take $1000 that you held as currency and put it into the banking system, then the total amount of deposits in the banking system increases by $0 in present case -

Because,

1) Money multiplier = 1 / reserve ratio

= 1 / 1

= 0

2) Change in reserve due to deposit = $1000

3) Change in Money Supply = Change in Reserves * Money Multiplier

= $1000 * 0

= 0

Basically what's happening here is that the bank reserves the whole amount deposited in the bank for any time demand withdrawal by the depositor. Bank does not lends any part of the money deposited into the market so the money goes from being unused under the mattress to being unused in 100% reserve system and thus it doesn't increases the money supply at all.

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