Answer:
a. The initial change in the money supply would be $0
b. The initial change in deposits would be $3,000.
c. Total reserves will also increase by $3,000.
d. The excess reserves is $2,820.
e. Cumulative change = $47,009
Explanation:
(a) Currency in circulation and bank deposits are both parts of the money supply.
So, when a man paid DMV with 300,000 pennies or $3,000 which DMV deposited into its account then in that case currency in circulation decreased by $3,000 and bank deposits increase by $3,000.
Since one component of the money supply is increasing while other is decreasing and that also by the same amount there will be no change in the money supply.
So, the initial change in the money supply would be $0
(b) DMV has deposited $3,000 into its bank account.
So,
Deposits will increase by $3,000.
Thus,
The initial change in deposits would be $3,000.
(c)
Total reserves increases in the equal amount of the increase in deposits.
Deposits have increased by $3,000.
So,
Total reserves will also increase by $3,000.
Thus,
The initial change in total reserves would be $3,000.
(d) New deposit created = $3,000
Reserve requirement = 6 percent
Required reserves created = $3,000 * 0.06 = $180
Excess reserves = New deposit - Required reserves = $3,000 - $180 = $2,820
The excess reserves is $2,820.
(e) Reserve requirement = 6% or 0.06
Money multiplier = 1/Reserve requirement = 1/0.06 = 16.67
Calculate the cumulative change in the banking system in lending capacity -
Cumulative change = Excess reserves * Money multiplier
Cumulative change = $2,820 * 16.67 = $47,009
The cumulative change in the banking system in lending capacity would be $47,009.
