Suppose the banking system does NOT hold excess reserves and the reserve ratio is 20%. If Sam deposits $500 cash in his checking account, the banking system can increase the money supply by:

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Quizplus · Accepted Answer

The money multiplier is 1/reserve ratio, which is 1/0.20 = 5. The banking system can increase the money supply by the deposit amount multiplied by the money multiplier: $500 * 5 = $2,500. However, since the initial deposit is not new money, the increase in money supply is $2,500 - $500 = $2,000.

Suppose the Banking System Does NOT Hold Excess Reserves and the Reserve