Question

The monetary multiplier Suppose that Tim makes a new cash deposit of $45,000 at his bank. Suppose that the bank is required only to keep new cash reserves equal to 30%. Then the maximum amount Tim's deposit will the money supply is $ . Which of the following assumptions must hold to ensure that the money creation process initiated by Tim's deposit reaches its potential? Check all that apply. Some borrowers spend only a fraction of the borrowed funds. All borrowers quickly spend all of their newly acquired funds. All banks in the banking system lend all of their excess reserves. Some borrowers wait a few months before they begin to spend the borrowed funds.

Answer 1

Answer:  The maximum amount Tim's deposit will the money supply is $1,04,895.

Explanation:

Given that,

new cash deposit(DD) = $45,000

Required reserves (RR) = 30% of the deposited amount( $45000)

= $\frac{30}{100} \times 45000$

= $13,500 ⇒ this much amount banks have to keep with them and the remaining amount is used for giving loans.

Money multiplier = $\frac{1}{RR}$

= $\frac{1}{30%}$

= 3.33

So, the maximum amount Tim's deposit will the money supply = (DD - RR) \times money multiplier

= (45000 - 13500) × 3.33

= 31500 × 3.33

= $1,04,895

Following assumptions must hold to ensure that money supply created in the economy from the deposits is at its potential:

(a) All borrowers quickly spend all of their newly acquired fund.

(b) All banks in the banking system lend all of their excess reserves.