Question

assume that $4.6 million is deposited into a bank with a reserve requirement of 10 percent. instructions: round your answer to two decimal places. a. what is the maximum value that the money supply can reach based on this information after multiple rounds of lending? b. if the government decides to raise the reserve requirement to 20 percent, what is the new maximum value that the money supply can reach in this case?

Answer 1

The increase in money supply = $ 50 million

What is Reserve requirement and money supply?

The amount of money in circulation at any given moment is referred to as the money supply. The total quantity of currency in circulation, including notes, coins, and account bank balances, is known as the money supply.

a. How to determine the shift in the money supply:

Deposit in a bank = $4.6 million

Reserve requirement = 10%

Money multiplier = 1 / Reserve requirement

                            = 1 / 0.1  

                            = 10

Therefore increase in money supply = $(10*4.60) million

                                                            = $ 46 million

(B). New change in money supply:

Deposit in bank = $4.6 million

Reserve requirement = 20% = 0.20

Money multiplier = 1 / reserve requirement

                            = 1 / 0.20

                            = 5

Therefore increase in money supply = $(5 * 10) million = $ 50 million

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