Table 10-3
The following information pertains to the Bank of Kamloops.
-Refer to the Table 10-3.Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency.If the Bank of Kamloops decides to hold exactly 5 percent in reserves,by how much would the economy's money supply increase?
A) $500
B) $1200
C) $1500
D) $2000

Question

Table 10-3
The following information pertains to the Bank of Kamloops. 
-Refer to the Table 10-3.Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency.If the Bank of Kamloops decides to hold exactly 5 percent in reserves,by how much would the economy's money supply increase?
A) $500 
B) $1200 
C) $1500 
D) $2000

Quizplus · Accepted Answer

The Bank of Kamloops currently has excess reserves of $1200 ($12,000 - $9600). If they decide to hold exactly 5% in reserves ($600), they will have $600 more to loan out. Due to the money multiplier effect, this will increase the money supply by $1200 ((1/0.05) x $600). Therefore, the economy's money supply will increase by $1200.

Table 10-3 The Following Information Pertains to the Bank of Kamloops