Table 21-6.

-Refer to Table 21-6.Assume the Fed's reserve requirement is 6 percent and that the Bank of Springfield makes new loans so as to make its new reserve ratio 6 percent.From then on,no bank holds any excess reserves.Assume also that people hold only deposits and no currency.Then by what amount does the economy's money supply increase?
A) $50,200
B) $60,000
C) $72,000
D) $106,000

Question

Table 21-6.
 
-Refer to Table 21-6.Assume the Fed's reserve requirement is 6 percent and that the Bank of Springfield makes new loans so as to make its new reserve ratio 6 percent.From then on,no bank holds any excess reserves.Assume also that people hold only deposits and no currency.Then by what amount does the economy's money supply increase?
A) $50,200 
B) $60,000 
C) $72,000 
D) $106,000

Quizplus · Accepted Answer

To calculate the maximum amount of new money that can be created, we can use the formula:

Maximum amount of new money = (1/reserve requirement) x excess reserves

In this case, the reserve requirement is 6 percent, so the maximum amount of new money that can be created is:

(1/0.06) x $15,000 = $250,000

Because there are no excess reserves under the new reserve ratio, the bank can loan out the entire $250,000, which will increase the money supply by that amount. Therefore, the correct answer is B, $60,000.

Table 21-6. -Refer to Table 21-6.Assume the Fed's Reserve Requirement Is 6