Given:
Reserve requirement = 10%
Deposit = $5400
Find:
money the supply could expand = ?
Solution:
Money Supply = Monetary Base × Money Multiplier
Before we determine the money supply, the money multiplier must already be determined. Therefore:
$5400 (0.10) = $540
In this case, adding the two will give us the money supply
$5400 + $540 = $5940
Nevertheless, not all money is lent out or spent. Kept money reduces the money supply.
The restrain to the growth of the money supply when deposits expand are identified by 2 factors:
1. The amount above (excess reserves) what they are required to hold are being kept.
2. Their income rises as the public has the penchant to hold more cash as their income.