Final answer:
The total potential change in the money supply after a $5 million increase in excess reserves with a 10% reserve requirement is $50 million, calculated by multiplying the excess reserves by the money multiplier of 10.
Step-by-step explanation:
The student is asking about the effect of a monetary expansion on the money supply when the reserve requirement is 10 percent. If excess reserves increase by $5 million, the total potential increase in the money supply can be calculated using the money multiplier formula. The formula for the money multiplier is 1 / Reserve Requirement. Given a reserve requirement of 10%, the money multiplier is 10 (1 / 0.1 = 10).
In this scenario, if the initial increase in excess reserves is $5 million, the total change in money supply, once banks lend out these funds and they are redeposited and relent multiple times, can be up to $50 million, calculated as $5 million multiplied by the money multiplier of 10.