Question

Suppose the banking system does NOT hold excess reserves and the reserve ratio is 25%. If Melanie deposits $1,000 of cash into her checking account, the banking system can increase the money supply by:__________

Answer 1

$3,000

Step-by-step explanation:

Calculation for the increase the money supply

Using this formula

Increase in money supply=(Cash/Reserve ratio)-Cash

Increase in money supply=($1,000/0.25)-$1,000

Increase in money supply=$4,000-$1,000

Increase in money supply=$3,000

Therefore based on the information given the banking system can increase the money supply by $3,000