Table 21-5.

-Refer to Table 21-5.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 21-5.
 
-Refer to Table 21-5.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 money multiplier is 1/0.09 = 11.11. If the Bank of Pleasantville uses all its excess reserves to make loans, the money supply increases by the amount of the loans multiplied by the money multiplier.

Table 21-5. -Refer to Table 21-5.Assume the Fed's Reserve Requirement Is 9