Suppose you found a $100 bill that was lost for many years under your grandmother's mattress.If the banking system has a cash drain of 5%,its target reserve ratio is 20%,and all excess reserves were lent out,your new deposit of the $100 bill would lead to an eventual expansion of the money supply of

Question

Quizplus · Accepted Answer

The money multiplier formula is 1 / (cash drain ratio + reserve ratio). Here, it's 1 / (0.05 + 0.20) = 1 / 0.25 = 4. Therefore, the $100 deposit would lead to an expansion of the money supply by $100 * 4 = $400.

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