Question

Given no cash leakage and zero excess reserves held by banks, if reserves increase by $8 billion and the required reserve ratio is 9 percent, what is the resulting change in the money supply?

Answer 1

Answer:

The answer is $88,880,000

Explanation:

Multiplier effect = 1 / required reserve ratio

Required reserve ratio = 9 percent

Multiplier effect is therefore;

1/0.09

=11.11

Change is money supply is increase in reserve multiplied by multiplier effect

Increment in reserve = $8milion

11.11 x 8million

=$88,880,000

So, resulting change in the money supply is $88,880,000