Answer:
a. $33,333
b. $100,000
c. No, it will not.
Explanation:
a. If the reserve requirement is 12 %, how much will your deposit increase the total value of checkable bank deposits?
Money multiplier = 1/r
Where,
r = reserve requirement = 12%, or 0.12
Therefore, we have:
Money multiplier = 1/0.12 = 8.33 times
This means that my deposit will increase the total value of checkable bank deposits 8.33 times. Therefore, we have:
The total value of checkable bank deposits = $4,000 * 8.33 = $33,333
Therefore, the deposit will increase the total value of checkable bank deposits by $33,333.33.
b. If the reserve requirement is 4 %, how much will your deposit increase the total value of checkable deposits?
r = 4%, or 0.04
We therefore have:
Money multiplier = 1/0.04 = 25 times
This means that my deposit will increase the total value of checkable bank deposits 25 times. Therefore, we have:
The total value of checkable bank deposits = $4,000 * 25 = $100,000
Therefore, the deposit will increase the total value of checkable bank deposits by $100,000.
c. Will increasing the reserve requirement increase the money supply.
No, it will not.
From the above a and b, we can see that the lower the reserve requirement, the higher the money multiplier; while the higher the reserve requirement, the lower the money multiplier.
Therefore, increasing the reserve requirement will not increase the money supply.
