Question

Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. Assuming a required reserve ratio of 10%, what is the largest amount (in dollars) by which the money supply (not total deposits) can increase as a result of your action? Group of answer choices

Answer 1

Answer:

$1,500

Explanation:

The required reserve ratio is the proportion of the liabilities that a bank is required to keep at all times instead of loaning out or investing. A $150 dollars deposit results in a $150 increase in reserves. That being said, with a 10% reserve ratio, the increase in money supply as result of this deposit is:

$I=\frac{\ 150}{0.10} \\I=\ 1,500$

Money supply increases by $1,500