Question

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of _________ in demand deposits.

Answer 1

Answer:

$7,500,000

Explanation:

Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $1,500,000 injection into the money supply results in an overall increase of $7,500,000 in demand deposits

From the stated assumptions in the question,we will use the money multiplier to calculate the eventual effect of the $1,500,000 injection into the money supply.

Money multiplier can be calculated using this formula 1/r  (r is the required reserve ratio)

Therefore, the resulting change in demand deposits is as follows:

Change in Demand Deposits = Change in Fresh Reserves ×1/r

= $1,500,000×1/0.20

= $7,500,000