Question

Using the multiplier deposit formula, how much new money can be redistributed in the economy from loans based on a deposit of $40,000 when the bank is required to reserve 8% of deposits?

Answer 1

The bank can redistribute $500,000 in new money in the economy.

Step-by-step explanation:

The formula for calculating the money multiplier is 1 divided by the reserve ratio. In this case, the reserve ratio is 8%, which is equal to 0.08. Therefore, the money multiplier is 1 divided by 0.08, which is equal to 12.5.

To calculate the new money that can be redistributed in the economy, you multiply the deposit amount by the money multiplier. In this case, the deposit is $40,000, so the new money that can be redistributed is $40,000 multiplied by 12.5, which is equal to $500,000.

Therefore, based on a deposit of $40,000 and a reserve requirement of 8%, the bank can redistribute $500,000 in new money in the economy.