Question

Black Horse deposits $2,000 in cash in his checking account at Bank for the People of West Dakota. The reserve requirement is 25%. Which is the maximum expansion of the money supply possible from the original deposit?
a. $2,000
b. $4,000
c. $6,000
d. $8,000

Answer 1

Answer:

d. $8,000

Explanation:

Reserve requirement = 25% = 0.25

The money multiplier = 1 /Required reserve

The money multiplier = 1/0.25

The money multiplier = 4

The initial deposits = $2,000

The maximum possible expansion of deposits = Initial deposits * The money multiplier  = $2,000 * 4 = $8,000. Thus, the maximum expansion of the money supply possible from the original deposit is $8,000