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Suppose that the central bank has increased the money supply such that there are an additional...

Suppose that the central bank has increased the money supply such that there are an additional $387425 in excess reserves. If the reserve ratio is 8.0 percent, what is the maximum the money supply could increase?

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Answer #1

Answer:-

Data Given,

Additional Excess Reserve = $387425

Reserve ratio = 8% = 0.08

Here, We have to find the maximum money supply increased To do So, We will use the following formula:-

The maximum increase in money Supply = Additional excess Reserve * Money multiplier

Where,

Additional excess Reserve = $387425

Money multiplier = 1 / Reserve ratio(Reserve ratio is 8% = 0.08)

Money multiplier = 1 / 0.08

Money multiplier = 12.5

Substituting the Respective value in the formula:-

The maximum increase in money Supply = Additional excess Reserve * Money multiplier

The maximum increase in money Supply = $387425 * 12.5

The maximum increase in money Supply = $4,842,812.5

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