Answer:
maximum increase: $47,500
✓ Banks decide to keep some excess reserves on hand.
✓ Some loan recipients choose to hold some cash instead of depositing all of it in banks.
- Banks choose to loan out all excess reserves.
- All money loaned out is deposited back into the banking system.
Step-by-step explanation:
Calculate the maximum increase in the money supply by multiplying the bank's excess reserves by the money multiplier. To find the money multiplier, divide 1 by the reserve requirement.
To find the bank's excess reserves, multiply your winnings by the reserve requirement, then subtract that number from your winnings.
Consider the formula for the money multiplier.
money multiplier=1/reserve requirement
Here, the reserve requirement is 5%, so the money multiplier is 20 .
The bank has to hold 5% of your $2,500 deposit, or $125. To find the maximum possible increase in the money supply, multiply the excess reserves of $2,500−$125=$2,375 by the multiplier to get the answer of $47,500 .
Note that this is the maximum possible increase, but it assumes all available money is deposited into the banking system and that banks loan as much as they possibly can. If some cash "leaks out," then the actual impact on the money supply will be smaller. This may occur if some loan recipients hold onto cash instead of depositing the loan entirely back into the banking system. Similarly, if banks choose to hold onto some excess reserves instead of loaning them all out, the money supply will not be increased as much as the multiplier indicates.