Suppose a bank has excess reserves of $50 and the reserve ratio is 20%. If Andy deposits $5,000 of cash in his checking account and the bank lends $2,500 to Molly, the money supply:

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Andy's deposit of $5,000 increases the bank's reserves by $5,000, which gives the bank excess reserves of $5,050 ($50 + $5,000). The bank can lend out $2,500 (since the reserve ratio is 20%), which Molly takes out as a loan. This reduces the bank's excess reserves by $2,500 to $2,550 ($5,050 - $2,500). However, since Molly has the $2,500 as a deposit in her account, the money supply increases by $2,500. Therefore, the total change in the money supply is an increase of $2,500.

Suppose a Bank Has Excess Reserves of $50 and the Reserve