Table 16-5.
-Refer to Table 16-5. Assume the Fed's reserve requirement is 9 percent and all banks besides the Bank of Pleasantville are exactly in compliance with the 9 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Pleasantville decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?
A)$555.00.
B)$1,200.00.
C)$1,777.78.
D)$2,222.22.

Question

Table 16-5. 
-Refer to Table 16-5. Assume the Fed's reserve requirement is 9 percent and all banks besides the Bank of Pleasantville are exactly in compliance with the 9 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Pleasantville decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?
A)$555.00. 
B)$1,200.00. 
C)$1,777.78. 
D)$2,222.22.

Quizplus · Accepted Answer

The Bank of Pleasantville has excess reserves of $2,222.22 ($11,111.11 - $8,888.89) which is greater than the required reserve of $1,000.

If the Bank of Pleasantville decides to make new loans so as to end up with no excess reserves, it can lend out up to $2,222.22. This increase in loans will result in an increase in deposits, and in turn an increase in the money supply.

To calculate the increase in money supply, we can use the money multiplier formula:

Money multiplier = 1 / Reserve requirement

= 1 / 0.09 = 11.11

Increase in deposits = $2,222.22 x 11.11 = $24,691.36

Therefore, the money supply will eventually increase by $24,691.36.

Table 16-5. -Refer to Table 16-5. Assume the Fed's Reserve Requirement Is