Question

You take $200 you had kept under your mattress and deposit it in your bank account. Suppose this $200 stays in the banking system as reserves and banks hold reserves equal to 20 percent of deposits. The total amount of deposits in the banking system increases by , and the money supply increases by

Answer 1

The total amount of deposits in the banking system increases by $1.000, and the money supply increases by $800.

Step-by-step explanation:

Multiplier =1/reserve ratio

=1/0.2

=5

increase in deposits of banking system =deposit *multiplier

=200*5

=$1000

The initial deposits are in money supply itself, so we deduct that.

increase in money supply =increase in deposits -initial deposits

=1000-200

=$800