Question

You just received a bonus at your job of $4,000 which you decide to put in a saving account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar.

(a) The reserve requirement is 18%, how much will your deposit increase the total value of checkable deposits?
(b) If the reserve requirement is 7%, how much will your deposit increase the total value of checkable deposits?

Answer 1

(A) 22,222.22

(B) 57,142.86

Step-by-step explanation:

we will divide the deposit by the reserve requirement to know how much will expand the money supply.

4,000/0.18 = 22,222.22

4,000/0.07 = 57,142.86

The reasoning behind this multiplier effect is the following:

you deposit 4,000

the bank leave 18% = 920

And lend the remaninder: 3,080

Then, when this are deposit, again takes the minimun reserve and lend the remainder:

3,080 x 18% = 554.4

3,080 - 554.4 = 2,525.6

This process is repeated giving diminished amount to money available to lend. Thus, finding a limit on the division between fund and reserve requirement.

4,000/0.18 = 22,222.22