Question

Suppose your grandma sends you $100 for your birthday and you deposit $100 into your checking account at the local bank. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____ and, if the bank lends all excess reserves, the money supply could eventually grow by as much as _____.

Answer 1

Answer:

$90; $900

Explanation:

Given that,

Amount of deposits = $100

Required reserve ratio = 10%

Required reserves:

= Amount of deposits × Required reserve ratio

= $100 × 10%

= $10

Excess reserves = Deposits - Required reserves

                           = $100 - $10

                           = $90

Money multiplier:

= 1/ Required reserve ratio

= 1/ 0.1

= 10

Money Supply:

= Amount of excess reserves used for lending × Money multiplier

= $90 × 10

= $900

The money supply could eventually grow by as much as $900.