Final answer:
When the banks change from 1% to 0% excess reserves, the money supply decreases by $2,222.22.
Step-by-step explanation:
To calculate the increase in money supply when banks change from 1% to 0% excess reserves, we need to understand the relationship between reserves and money supply. When banks have excess reserves, they have the ability to lend out more money, which increases the money supply. In this case, let's assume the initial bank reserves are $5,000 and the required reserve ratio (RRR) is 15%. When the RRR is 15%, banks must hold reserves equal to 15% of their deposits. Therefore, the initial deposits when the RRR is 15% would be $5,000 / 0.15 = $33,333.33.
Now, with 1% excess reserves, the bank is holding an extra 1% of $33,333.33. This is $333.33 in excess reserves and $4,666.67 in required reserves. If the bank lends out all the excess reserves and changes to 0% excess reserves, the actual reserves will be equal to the required reserves. Therefore, the actual reserves will be $4,666.67.
To calculate the change in the money supply, we can use the money multiplier formula: Money Supply = (1 / RRR) * Reserves. In this case, the RRR is 15% and the initial reserves are $4,666.67. So, Money Supply = (1 / 0.15) * $4,666.67 = $31,111.11.
When the bank changes from 1% to 0% excess reserves, the money supply increases by $31,111.11 - $33,333.33 = -$2,222.22. However, this negative change indicates a decrease in the money supply.