Step-by-step explanation:
When the customer deposits $25,000 into the bank, the bank is required to keep 10% of that amount in reserve, which is $2,500. This leaves the bank with $22,500 in excess reserves that it can lend out to borrowers.
Assuming the bank lends out all of its excess reserves, the borrower will receive the $22,500 loan, which will then be deposited into another bank account. Let's assume that the recipient of the loan deposits the entire $22,500 back into the same bank that made the loan.
At this point, the bank has $47,500 in total deposits ($25,000 initial deposit + $22,500 loan deposit). However, the bank is still required to keep 10% of these deposits in reserve, which is $4,750. This means the bank has $42,750 in excess reserves that it can lend out again.
Therefore, the initial deposit of $25,000 has resulted in a total increase in the money supply of $47,500 ($25,000 initial deposit + $22,500 loan deposit). The bank's reserves are $4,750 ($2,500 initial reserve + $2,250 from the loan deposit).