Suppose you found a $100 bill that was lost for many years under your grandmother's mattress and you decided to deposit this money in a commercial bank.If the target reserve ratio were 20% and all excess reserves were lent out,your new deposit of $100 would lead to an eventual expansion of the money supply of

Question

Quizplus · Accepted Answer

The money supply expands through the money multiplier effect, which is calculated as 1/reserve ratio. With a 20% reserve ratio, the multiplier is 1/0.20 = 5. Therefore, a $100 deposit can lead to a $500 increase in the money supply ($100 * 5).

Suppose You Found a $100 Bill That Was Lost for Many