Question

The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. Reference: Ref 14-5 (Scenario: Money Creation) Look at the scenario Money Creation. Immediately after the deposit, reserves _____ and demand deposits _____ by $1,000. Group of answer choices

Answer 1

Given :

Reserve requirement = 20 %

Leroy receives = $1000

So the bank can hold
`$20\%$` of
`$1000$` as a reserve. That means, it is has to hold
`$200$` as reserves. So it can lend the remaining
`$800$`.

`$\text{Multiplier} = \frac{1}{\text{required reserve ratio}}$`

`$=(1)/(0.2)$`

= 5

Thus, the maximum expansion of money supply = 800 x 5

= 4000