-Refer to Table 10-3. Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency. If the Bank of Kamloops decides to hold exactly 5 percent in reserves, by how much would the economy's money supply increase?
A) $500
B) $1200
C) $1500
D) $2000

Question

-Refer to Table 10-3. Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency. If the Bank of Kamloops decides to hold exactly 5 percent in reserves, by how much would the economy's money supply increase?
A) $500 
B) $1200 
C) $1500 
D) $2000

Quizplus · Accepted Answer

The money supply would increase by $1200 because the Bank of Kamloops would release $1000 in excess reserves, which would be deposited in other banks. These banks would then lend out 95% of these deposits, or $950. This process would continue until the initial $1000 in excess reserves had been multiplied by a factor of 20, resulting in a total increase in the money supply of $1200.