Question

Suppose the country's money supply is equal to $12 million.
The FED buys $3 million worth of bonds from Wells Fargo customers depositing it in their bank accounts.
Wells Fargo then lends out 90% of the new deposits.
At this point:

1. What is the new total money supply?  

2. What is the money multiplier?  

Answer 1

a.

Since the country's money supply is equal to $12 million.
The FED buys $3 million worth of bonds from Wells Fargo customers depositing it in their bank accounts.

Wells Fargo then lends out 90% of the new deposits.
At this point the required reserve is 10% because bank keep required reserve and lend remaining money.

RR=0.10

Money multiplier= 1/ required reserve

=1/0.10

=10

The increase in the money supply by=$3 millions

Total money creation= money multiplier* change in money supply

=10*$3 million

=$30 millions

New total money supply=$12 million+ $30 millions

=$42 million

b.

money multiplier=10