Question

Reserve Requirement: calculate the change in money supply if the change in excess reserves is $100 and the reserve requirement is 5

Answer 1

Change in the money supply = 1/m x initial change in excess reserves.

The value of m, the required reserve ratio, is 5% or 0.05.

The deposit of $100 cash adds $100 to the bank's reserves.

The bank's required reserves = m x demand deposits = 0.05 x $100 = $5

To solve for excess reserves in the formula on the first line, we use

Excess Reserves = Reserves - Required Reserves.

Excess Reserves = $100 - $5 = $95.

Substituting the values for m and excess reserves yields:

Change in the money supply = (1/0.05) x $95 = $1,900