Question

You just deposited $4,000 in cash into a saving account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 16%, how much will your deposit increase the total value of checkable bank deposits? If the reserve requirement is 6%, how much will your deposit increase the total value of checkable deposits? Increasing the reserve requirement ________the money supply.

Answer 1

The money multiplier given the reserve requirement can be calculated by;

= 1/ reserve requirement.

1. If the reserve requirement is 16%

Money Multiplier = 1/0.16

= 6.25

The increase in money supply ( checkable bank deposits) is the result of the money multiplier times the new cash.

= 6.25 * 4,000

= $25,000

2. If the reserve requirement is 6%

Money Multiplier = 1/0.06

= 16.67

Increase in money supply;

= 16.67 * 4,000

= $66,680‬

3. Increasing the reserve requirement increases the money supply.