Assume that the banks do not hold any excess reserves and the reserve ratio is 20%. If Sarah deposits $5,000 in cash in her checking account, the money supply can potentially increase by:

Question

Quizplus · Accepted Answer

The money multiplier is 1 divided by the reserve ratio, which is 1/0.20 = 5. The initial deposit of $5,000 can increase the money supply by $5,000 * 5 = $25,000. However, since the initial deposit is already part of the money supply, the net increase is $20,000.

Assume That the Banks Do Not Hold Any Excess Reserves