An initial increase in excess reserves of $90,000 in a simplified banking system with a 10 percent required reserve ratio would increase the money supply by $900,000.
In a simplified banking system with a 10 percent required reserve ratio, the money supply can be influenced by changes in excess reserves.
The required reserve ratio is the percentage of deposits that banks are required to hold as reserves, and excess reserves are the reserves held by banks beyond the required amount.
When there is an initial increase in excess reserves, banks have the opportunity to make loans and create new money through the process of fractional reserve banking.
The money supply can expand through the multiplier effect, which is determined by the reciprocal of the reserve ratio.
In this scenario, with a 10 percent required reserve ratio, the reserve multiplier is calculated as:
Reserve Multiplier=1
Required Reserve Ratio=10.10=10Reserve Multiplier= Required Reserve Ratio1 = 0.101 =10
Now, if there is an initial increase in excess reserves of $90,000, the potential increase in the money supply can be calculated as:
Increase in Money Supply=Reserve Multiplier×Increase in Excess Reserves
Increase in Money Supply=Reserve Multiplier×Increase in Excess Reserves
\text{Increase in Money Supply} = 10 \times $90,000 = $900,000
Therefore, in this simplified banking system, if all possible loans are made in response to an initial increase in excess reserves of $90,000, the money supply is expected to increase by $900,000.
Therefore, the correct answer is: increases $900,000.