Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by an additional:

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The potential increase in the money supply due to Sarah's deposit can be calculated using the money multiplier formula, which is 1/reserve ratio. With a reserve ratio of 20% (or 0.2), the money multiplier is 1/0.2 = 5. Therefore, Sarah's $5,000 deposit can potentially increase the money supply by 5 * $5,000 = $25,000. However, since the original $5,000 is part of this total increase, the additional increase in the money supply, beyond her initial deposit, is $20,000.

Assume That the Banks Do Not Hold Any Excess Reserves