Table 29-5

-Refer to Figure 29-5.Assume that all other banks hold only the required 4 percent of deposits as reserves and that people hold only deposits and no currency.If the Bank of Springfield decides to hold reserves of 4 percent,by how much would the economy's money supply increase?
A)$50,200
B)$60,000
C)$65,400
D)$72,000

Question

Table 29-5
 
-Refer to Figure 29-5.Assume that all other banks hold only the required 4 percent of deposits as reserves and that people hold only deposits and no currency.If the Bank of Springfield decides to hold reserves of 4 percent,by how much would the economy's money supply increase?
A)$50,200 
B)$60,000 
C)$65,400 
D)$72,000

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 1/0.04 = 25. If the Bank of Springfield holds reserves of 4 percent, the money supply increases by the initial deposit multiplied by the money multiplier. Assuming the initial deposit is $2,400, the increase in money supply is $2,400 * 25 = $60,000.

Table 29-5 -Refer to Figure 29-5.Assume That All Other Banks Hold Only