Answer:
money supply will increase by 2,400,000
Explanation:
the expansion f the money supply will be:
the money multiplier will be:
1/reserve ratio = 1/0.125 = 8
300,000 x 8 = 2,400,000
The reasoning for the multiplier effect is the following:
once the money is received, it will be used, and the person who receive the cash will deposit their proceeds.
This amount, can generate a new loan for, the remainder after subtracting the required reserve.
300,000 - 12.5% = 262,500
And this, once used will also end in a deposit. This opens the posibility for another loan, after reducing the reserve
262,500 - 12.5% = 229,687.5
This can be reapeat again and again and the limit for this is the formula state above:
multiplier effect = 1/reserve ratio
