Question

If Grandma Esther deposits $300 in her bank, and the reserve requirement for that bank is 15%, what is the amount of money created in the economy from Grandma Esther's deposit?

Answer 1

Grandma Esther's $300 deposit with a 15% reserve requirement can potentially create $2,001 in the economy using the money multiplier of approximately 6.67.

Step-by-step explanation:

If Grandma Esther deposits $300 in her bank, with a reserve requirement of 15%, the bank can lend out 85% of that deposit. The amount of money created in the economy from this initial deposit is calculated using the money multiplier formula, which in turn is the inverse of the reserve ratio. The reserve ratio is the portion of depositors' balances that the banks must have on hand as cash. Given a 15% reserve requirement, the reserve ratio is 0.15, and therefore the money multiplier is 1/0.15, which equals approximately 6.67. So, the total potential money created in the economy from Grandma Esther's initial $300 deposit will be $300 multiplied by 6.67, which is $2,001.