Suppose that your grandma sends you $100 for your birthday and you deposit that $100 in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as an additional _____.

Question

Quizplus · Accepted Answer

The bank's excess reserves increase by $90 because it must keep 10% ($10) as required reserves. The money supply could grow by $900 because the $90 can be loaned out and re-deposited, creating a money multiplier effect (1/0.10 = 10; $90 * 10 = $900).

Suppose That Your Grandma Sends You $100 for Your Birthday