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-(Table: Assets and Liabilities of the Banking System)Refer to Table: Assets and Liabilities of the Banking System.If the reserve ratio is 8% and the banking system does NOT want to hold excess reserves,how much more can be added to the money supply?

Question

Use the following to answer questions: 
-(Table: Assets and Liabilities of the Banking System)Refer to Table: Assets and Liabilities of the Banking System.If the reserve ratio is 8% and the banking system does NOT want to hold excess reserves,how much more can be added to the money supply?

Quizplus · Accepted Answer

The potential increase in the money supply is equal to the initial excess reserves multiplied by the money multiplier. In this case, the initial excess reserves are $500,000 (total reserves of $2 million less required reserves of $1.5 million). The money multiplier is equal to 1/reserve ratio, or 1/0.08 = 12.5. Therefore, the potential increase in the money supply is $500,000 x 12.5 = $6,250,000. If the banking system does not want to hold excess reserves, they will lend out the full amount of the initial excess reserves, which is $500,000. So, the additional increase in the money supply is $500,000 x 12.5 = $6,250,000 - $500,000 = $5,750,000. Rounded to the nearest thousand, this is about $250,000.

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