If the Central Bank of Macroland puts an additional 1,000 dollars of currency into the economy, the public deposits all currency into the banking system, and banks have a desired reserve/deposit ratio of 0.10, then the banks will eventually make new loans totaling ________ and the money supply will increase by ________.
A)$1,000; $1,000
B)$9,000; $9,000
C)$9,000; $10,000
D)$1,000; $9,000

Question

Quizplus · Accepted Answer

In this case, the money multiplier is 1/0.10 = 10. If 1,000 new dollars of currency are deposited in banks, they must hold $100 as required reserves and can lend out $900. Through the money multiplier, loans will increase by $900 × 10 = $9,000. The expansion of the money supply is the original deposit(s)+ the increase in loans or $1,000 + $9,000 = $10,000.

If the Central Bank of Macroland Puts an Additional 1,000