Question

If a country’s required reserve ratio is 8%, when the central bank puts $1,000 of new currency into circulation, by how much can the money supply grow assuming all currency is deposited in a bank and no banks hold excess reserves? Use the simple money multiplier.

Answer 1

$12,500

Step-by-step explanation:

Given that,

Central bank increases the money supply in circulation by put $1000 of new currency. So,

Deposits = $1,000

Required reserve ratio = 8%

Required reserves = 8% of $1,000

= $80

Money multiplier = 1 ÷ Required ratio

= 1 ÷ 8%

= 12.5

Therefore,

Total change in money supply = Money multiplier × Deposits

= 12.5 × $1,000

= $12,500