Question

Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

Answer 1

The answer is $900

Step-by-step explanation:

Money supply is the total value of money available in an economy at a particular time i.e the total amount of money in an economy at a particular time. A decrease in the reserve ratio leads to an increase in the money supply and an increase in the reserve ratio leads to a decrease in the money supply.

Money multiplier is 1/required reserve ratio

=1/0.1

10

Money supply will be 1 - 10 = 9

Therefore, increase in money supply will be:

new reserves/deposit x money supply

$100 x 9

=$900