Suppose that your grandma sends you $100 for your birthday and you deposit that amount in your chequing 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

The excess reserves of the bank will increase by the amount of the deposit multiplied by the reserve ratio, which is 10%. So the excess reserves will increase by $10 ($100 x 0.1 = $10). If the bank lends these new excess reserves, the money supply could increase by up to 1/reserve ratio times the new loans, which is 1/0.1 x $10 = $100. Therefore, the money supply could eventually grow by an additional $100. Therefore, the correct choice is C) $90 for excess reserves and $900 for potential money supply growth.

Suppose That Your Grandma Sends You $100 for Your Birthday