Suppose you found $10,000 hidden under a rock and deposited it in a demand deposit account at your bank.If the reserve requirement was 10 percent, your deposit would add ____ to total demand deposits; the added loans that the banking system as a whole could make as a result of the deposit would generate ____ in additional demand deposits.

Question

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With a reserve requirement of 10 percent, the bank must hold $1,000 of the $10,000 deposit as reserves and can lend out the remaining $9,000. This $9,000 in loans will eventually become deposits in other banks, adding to the total demand deposits in the banking system. The maximum increase in total demand deposits is found by dividing the initial deposit by the reserve requirement: $10,000/0.1 = $100,000. Therefore, the deposit would add $10,000 to total demand deposits and generate $90,000 in additional demand deposits, for a total increase of $100,000.

Suppose You Found $10,000 Hidden Under a Rock and Deposited