Question

Suppose that you take $350 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 9%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action?

Answer 1

Answer:

= $3,888.89

Step-by-step explanation:

First, calculate the money multiplier(MM); which is the amount of money that is generated by the banks for each dollar of reserve. In this case, it describes how a deposited amount increases the total supply of money.

Money Multiplier = 1 / reserve ratio

Reserve ratio = 9% or 0.09

Therefore, money multiplier = 1/0.09 = 11.1111

Next, use the reserve ratio to calculate the amount of increase in money supply;

= 11.1111 * $350

= $3,888.89