Question

1. Perform the following calculations
   1. Mathematically determine the effect (change) to the money supply if $7000 dollars is deposited and the RRR is 13%.

Answer 1

Given, Reserve Requirement Ratio (RRR) = 13%, Deposit = $7,000

Money multiplier tells us how much money supply will increase by an initial deposit. So, to find the increase in the money supply, we will first calculate money multiplier:

Money Multiplier = 1 / Reserve Requirement Ratio

Money Multiplier = 1 / 13% = 100/13

To find the final increase in money supply we will multiply the deposit by the money multiplier:

Increase in money supply = 7000 * 100/13 = 53,846.153

So, if $7,000 is deposited in the bank, then the final increase in the money supply will be of $53,846.153.