Question

Suppose that the central bank has increased the money supply such that there is an additional $ 231115 in excess reserves. If the reserve ratio is 15 percent, what is the maximum increase in money supply

Answer 1

$1541537.05

Step-by-step explanation:

Calculate the money multiplier

= 1/ reserve ratio

reserve ratio = 15% = 0.15

therefore the money multiplier = 1/0.15 = 6.6666 ≈ 6.67

to calculate the maximum increase in money supply would be

money multiplier * excess reserve added

6.67 * $231115 = $1541537.05

since there is an increase in money supply by the central bank and this resulted in an additional $231115 in excess reserve hence the maximum increase in money supply will be $1541537.05

Answer 2

$196448

Step-by-step explanation:

Since the central bank has increased the money supply by $231115 but the reserve ratio is maintained at 15%, this means that 85% of the money is being injected in the form of money supply.

Hence, the maximum increase in money supply, the 85% of $231115 is: $196448.

Hope this helps.

Thank you and Good luck.