Table 29-5.
Bank of Kopeka

-Refer to Table 29-5.Assume the Fed's reserve requirement is 9 percent and all banks besides the Bank of Kopeka 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 Kopeka 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 29-5.
Bank of Kopeka
 
-Refer to Table 29-5.Assume the Fed's reserve requirement is 9 percent and all banks besides the Bank of Kopeka 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 Kopeka 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 Kopeka has excess reserves of $2,222.22 (calculated by subtracting required reserves of $8,000 from actual reserves of $10,222.22). Assuming the Bank of Kopeka lends out all of its excess reserves, it can make new loans of $2,222.22. Since people hold only deposits and no currency, this new money will be deposited into other banks, who will also lend out their excess reserves. Based on the multiplier effect, the eventual increase in the money supply will be 1/0.09 x $2,222.22 = $24,691.36. Therefore, the money supply will increase by $24,691.36 - $22,469.14 (original deposits) = $2,222.22, which is choice D.

Table 29-5. Bank of Kopeka