Question

Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. Assuming a required reserve rate of 10%, what is the largest amount by which the money supply can increase as a result of your action?

Answer 1

Answer= $150*10=$1,500
With a required reserve ratio of 10% the corresponding money multiplier is 10.

This result is given by the equation:

m^m= 1 ÷ rr

m^m= 1 ÷ 0.10 = 10.

With a money multiplier of 10, and with the assumptions that banks hold zero excess reserves and that all money is deposited, through the process of lending and depositing the initial $150 becomes 10 × $150 = $1,500. The initial $150 deposit is regarded as an increase to the money supply, so it does not need to be deducted at the end.