Question

if the current reserve requirement is 15%, and you deposited some cash into the bank (assume the cash was again created out of thin air), and the cash was able to multiply, through loans, into $4,000, how much did you originally deposit?

Answer 1

To find the original deposit with a reserve requirement of 15% and a final money supply of $4,000, divide the total by the money multiplier (6.67), yielding approximately $600 as the original deposit.

Step-by-step explanation:

To determine the original deposit amount when the reserve requirement is 15% and the final amount of money created is $4,000, we use the money multiplier formula. In this scenario, the money multiplier can be calculated as 1 / Reserve Requirement, which is 1 / 0.15 or approximately 6.67. This means that every dollar of reserves creates $6.67 of money supply through the lending process.

If $4,000 is the final amount of money that has been created, we can reverse the process to find the original deposit. We divide the total money supply by the money multiplier, giving us $4,000 / 6.67, resulting in an initial deposit of about $600. The bank holds 15%, or $90, of that deposit as reserves, and the rest is circulated through loans, eventually multiplying to the $4,000 in the economy.