Final answer:
Depositing $150 with a reserve requirement of 12.5% allows the bank to lend out the remainder, initiating a process where the total deposits and the money supply can increase by up to $1200 due to the money multiplier effect.
Step-by-step explanation:
When you deposited $150 into the banking system with a reserve requirement of 12.5%, the bank will hold $18.75 (12.5% of $150) in reserves and can loan out the rest, which is $131.25. This loan then gets deposited into another bank account, and that bank can lend out 12.5% less of that deposit, and the process continues. This is where the concept of the money multiplier comes into play. The money multiplier is calculated as 1 divided by the reserve ratio. In this case, it would be 1 / 0.125 = 8. This means every dollar deposited can ultimately increase the money supply by 8 times that amount under the reserve requirement system.
Therefore, the total amount of new deposits the banking system can create from the initial $150 deposit is $150 x 8 = $1200. So, the banking system can potentially increase the total deposits by $1200, which also increases the total money supply by the same amount, assuming every bank lends out the maximum amount possible and all loans are redeposited into the banking system.