Question

The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit?a.$1,000b.$1,800c.54,000d.$5,000

Answer 1

d.$5,000

Step-by-step explanation:

In order to find the maximum amount of possible expansion in the money supply we will have to find the money multiplier. The formula for the money multiplier is

1/reserve ration =1/0.2=5

Now that we know that the multiplier is 5 we will multiply is by 1000 which is the initial deposit, to get the total possible expansion in the money supply, 1000*5= 5000