Question

The required reserve ratio for Jack's bank is 10 percent. If Jack deposits $2,000 cash in his checking account, what is the amount of new money the bank would create when it lends out its excess reserves?

Answer 1

Answer: Jack deposits $2000, given 10% required reserves, the bank has to keep 10% of $2000 in reserves with the central bank.

Thus, $reserves = 0.10* 2000= 200$

Excess reserves for loaning out = $2000 - $200 =$1800

The increase in money supply can be found out by using the money multiplier formula.

$m=\frac{1}{r}$

$m=\frac{1}{0.1} = 10$

Therefore,

$Change in Money supply = Multiplier * Change in Deposits$

$= 10 * 2000 = 20,000$

Thus, the money supply increases by $20,000.