Question

After saving money in his piggy bank for three years, Omar decided to deposit $2,500 of the money in the local bank. If the bank were fully loaned out and the reserve requirement was 20 percent, then the change in the dollar value of the total money supply would be __________.

Answer 1

Answer:

The money supply will increase by 12,500 dollars

Explanation:

when the money is deposited the loan will make the required reveneus and start loans for the remained over and over

The multiplier effect will be 1/required reserve ratio: 1/0.2 = 5

we multiply 2,500 dollars times the money multiplier of 5

total icnrease inthe money supply: 2,500 x 5 = 12,500