Suppose your grandma sends you $100 for your birthday and you deposit that $100 in your checking account. The reserve ratio is 10%. Based upon this deposit, the bank's excess reserves have increased by _____, and if the bank lends these new excess reserves, the money supply could eventually grow by as much as an additional _____.

Question

Quizplus · Accepted Answer

When you deposit $100 in your checking account, the bank's excess reserves increase by $90 (10% of $100 is held as required reserves). If the bank lends these new excess reserves, the money supply could potentially grow by up to $900 (using the money multiplier formula of 1/reserve ratio, so 1/0.1 = 10, and $90 x 10 = $900). Therefore, choice C is the correct answer.

Suppose Your Grandma Sends You $100 for Your Birthday and You