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 0.20, then the banks will eventually make new loans totaling ______ and the money supply will increase by _______.

Question

Quizplus · Accepted Answer

In this case, the money multiplier is 1/0.20 = 5. If 1,000 new dollars of currency are deposited in banks, they must hold $200 as required reserves and can lend out $800. Through the money multiplier, loans will increase by $800 × 5 = $4,000. The expansion of the money supply is the original deposit(s) + the increase in loans or $1,000 + $4,000 = $5,000.

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