Suppose the First National Bank acquires $500,000 in new deposits and the desired reserve ratio is 12 percent.By what amount can the First National Bank increase the money supply?

Question

Quizplus · Accepted Answer

If the desired reserve ratio is 12 percent, then the bank must hold onto 12 percent of the $500,000 in new deposits ($60,000) and can lend out the remaining $440,000. This increase in loans will increase the money supply by the same amount, so the First National Bank can increase the money supply by $440,000.

Suppose the First National Bank Acquires $500,000 in New Deposits