Question

After saving money in her piggy bank for 3 years, Beverly decided to deposit $5,000 of the money in the Millertown Bank. If the bank were fully "loaned out" and the required reserve ratio were 20%, then the maximum change in the money supply due to this deposit would be $25,000. $20,000. $5,000. $4,000. $1,000.

Answer 1

$25,000

Step-by-step explanation:

The computation of the maximum change in money supply is shown below:

= Deposit amount × money multiplier

= $5,000 × 5

= $25,000

Where, money multiplier is

= 1 ÷ required reserve ratio

= 1 ÷ 20%

= 5

So by multiplying with the deposit amount with the money multiplier we can get the maximum change in the money supply