When Maria deposits $1,000 in cash at ABC Bank, the money supply will expand as the bank loans out the excess reserves. The money multiplier of 4 indicates that for every $1 of reserves, banks can create $4 of new money.
When Maria deposits $1,000 in cash at ABC Bank, the bank is required to hold 25% of that amount as reserves. In this case, the required reserve is $250. The remaining $750 is considered excess reserves. Since the bank keeps no excess reserves, it will loan out the entire $750 to other borrowers. These borrowers can then deposit the borrowed money in other banks, which will also loan out a portion of the deposits, continuing the process.
The money supply will expand as a result of this process. To determine the money supply expansion, we can use the money multiplier. The money multiplier is the reciprocal of the reserve requirement ratio, which in this case is 1/0.25, or 4. This means that for every $1 of reserves, banks can create $4 of new money. Therefore, the initial deposit of $1,000 will result in a total money supply expansion of $4,000.
Complete Question
ABC Bank is a commercial bank in Country X. Assume the required reserve ratio is 25% and banks in Country X keep no excess reserves. If Maria deposits $1,000 in cash at ABC Bank, what will happen to the money supply after all adjustments are made in the banking system?