Question

Suppose that the public holds 50% of the money supply in currency and the reserve requirement is 20%. Banks hold no excess reserves. A customer deposits $6,000 in her checkable deposit. As a result of the deposit, required reserves will increase by:

Answer 1

Answer:

the required reserves will increase by 1,200 dollars

Explanation:

the required reserve ratio is 20%

for each dollar the bank receive in deposit it can loan up to 80% and must keep 20%

the multiplier will be: 1 / 0.2 = 5

each dollar of deposit will increase the money supply by 5

and each dollar withdraw will decrease money supply by 5

Therefore, for this deposit of 6,000 dollars the bank will kept:

$6,000 x 20% = $1,200