Question

If the required reserve ratio is increased from 10 percent to 12 percent and there is a $10,000 new deposit, the maximum increase in the money supply will be:

a. < $10,000
b. between $10,000 and $100,000
c. $100,000
d. > $100,000

Answer 1

The maximum increase in the money supply with a new $10,000 deposit and the reserve ratio increased from 10% to 12% would be less than $100,000, since the money multiplier effect would be reduced. The correct answer is option d. > $100,000.

Step-by-step explanation:

When the required reserve ratio is increased from 10% to 12% and there is a $10,000 new deposit, the maximum increase in the money supply can be calculated using the money multiplier formula.

The money multiplier is the reciprocal of the reserve ratio (1/reserve ratio). So, when the required reserve ratio is 10%, the money multiplier is 1/0.1 = 10. When the required reserve ratio is increased to 12%, the new money multiplier is 1/0.12 = 8.33.

To calculate the maximum increase in the money supply, multiply the new deposit amount by the money multiplier. In this case, the maximum increase in the money supply will be

$10,000 * 8.33 = $83,300.

Therefore, the correct answer is d. > $100,000.