The money supply of Hooba is $10,000 under a 100 percent reserve banking system. If Hooba decreases the reserve requirement to 10 percent, the money supply could increase by no more than $9000.

Question

Quizplus · Accepted Answer

According to the money multiplier formula, the maximum potential increase in the money supply is calculated as (1/reserve requirement - 1) times the initial amount of reserves. So, in this case, the maximum potential increase in the money supply would be (1/0.10 - 1) times $10,000, which equals $90,000. Therefore, the statement "the money supply could increase by no more than $9000" is false.

The Money Supply of Hooba Is $10,000 Under a 100