Question

Assume the reserve requirement is 10%. First National Bank receives a deposit of $5,400. If there is no slippage, how much could the money supply expand?

Answer 1

Given:

Reserve requirement = 10%
Deposit = $5400

Find:

money the supply could expand = ?

Solution:

Money Supply = Monetary Base × Money Multiplier

Before we determine the money supply, the money multiplier must already be determined. Therefore:
$5400 (0.10) = $540

In this case, adding the two will give us the money supply
$5400 + $540 = $5940

 

Nevertheless, not all money is lent out or spent. Kept money reduces the money supply.

The restrain to the growth of the money supply when deposits expand are identified by 2 factors:

1.       The amount above (excess reserves) what they are required to hold are being kept.

2.       Their income rises as the public has the penchant to hold more cash as their income.