If banks want to keep 15 percent of deposits in reserves, then a deposit of $10 000 into a demand Deposit at a chartered bank has the potential of increasing the money supply by:

Question

Quizplus · Accepted Answer

The deposit of $10,000 will increase the money supply by $67,000 because the bank will lend out 85% of the deposit, which is $8,500. This $8,500 will then be deposited into another bank, which will lend out 85% of that, and so on. This process will continue until the initial deposit of $10,000 has been multiplied by 1/(1-0.85) = 6.67, resulting in a total increase in the money supply of $67,000.

If Banks Want to Keep 15 Percent of Deposits in Reserves