Question

Assume that the required reserve ratio is 10 percent, banks keep no excess reserves and borrowers deposit all loans made by banks. Suppose you have saved $100 in cash at home and decide to deposit in your checking account. As a result of your deposit, the money supply can increase by a maximum of Group of answer choices

Answer 1

Depositing $100 in a bank account can potentially increase the money supply by up to $1,000 through the fractional-reserve banking system, as banks will keep 10% and lend out 90% of deposits repeatedly.

Step-by-step explanation:

Assume that the required reserve ratio is 10 percent, banks keep no excess reserves and borrowers deposit all loans made by banks. If you deposit $100 into your checking account, the money supply can increase by a maximum amount due to the money creation process of the banking system. Since the required reserve ratio is 10%, this means the bank can lend out 90% of deposits, or $90, in this case. However, when these $90 are deposited in a second bank, that bank will then lend out 90% of $90, which is $81, and so on. This process can continue repeatedly, effectively creating a maximum increase in the total money supply of $1,000, as the initial $100 deposit can undergo multiple rounds of lending and depositing, with each bank retaining 10% in reserves.

Answer 2

$1,000

Step-by-step explanation:

The computation of the increase in the money supply is shown below:

But before that the multiplier is

= 1 ÷ required reserve ratio

= 1 ÷ 0.10

= 10

Now the increase in the money supply is

= Multiplier × saving in cash at home

= 10 × $100

= $1,000

hence, the above represent the answer and the same would be relevant