Table 29-5 The following information pertains to the Bank of Kingston.

-Refer to Table 29-5. Assume that all other banks hold only the required 4 percent of deposits as reserves, and that people hold only deposits and no currency. If the Bank of Kingston decides to hold reserves of 4 percent, by how much would the economy's money supply increase?
A)$50 200
B)$60 000
C)$62 000
D)$65 400

Question

Table 29-5 The following information pertains to the Bank of Kingston.
 
-Refer to Table 29-5. Assume that all other banks hold only the required 4 percent of deposits as reserves, and that people hold only deposits and no currency. If the Bank of Kingston decides to hold reserves of 4 percent, by how much would the economy's money supply increase?
A)$50 200 
B)$60 000 
C)$62 000 
D)$65 400

Quizplus · Accepted Answer

The Bank of Kingston currently has 1,500,000 in deposits. If they hold 4 percent in reserves, they will remove 60,000 (1,500,000 x 0.04) from circulation.

Since all other banks only hold the required 4 percent, the money multiplier is 1/0.04 = 25.

Therefore, the economy's money supply would increase by $60,000 x 25 = $1,500,000.

Therefore, the correct answer is B ($60,000).

Table 29-5 the Following Information Pertains to the Bank of Kingston