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3. If the desired reserve ratio in the Canadian banking system is 20% and if a...

3. If the desired reserve ratio in the Canadian banking system is 20% and if a foreign company deposited 1 billion dollars to a Canadian bank, how much the total money supply would be increased? (5 points)
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Answer #1

Money multiplier (M) should be calculated first.

M = 1 / ratio

    = 1 / 20%

    = 1 / 0.20

    = 5

Money supply = deposit × M

                        = 1 billion dollar × 5

                        = 5 billion dollar

Answer: 5 billion dollar

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