Suppose the required reserve ratio is 25% and a customer deposits $300 in her checkable deposit. The money supply will _____ if the banking system does NOT hold any excess reserves.

Question

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The initial deposit of $300 increases the checkable deposit by $300. According to the required reserve ratio of 25%, the bank must hold $75 as reserves and can lend out the remaining $225. When this $225 is deposited in the bank by the borrower, the bank must reserve 25% of it, which is $56.25, and can lend out the remaining $168.75. This process continues until the amount that the banks can lend out becomes negligible. Therefore, the total increase in money supply will be $300 + $225 + $168.75 + … = $900.

Suppose the Required Reserve Ratio Is 25% and a Customer