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

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The required reserve ratio is 25%, which means that the bank is required to keep 25% of the deposit ($300) as reserves and can lend out the remaining 75%. If the bank does not hold any excess reserves, it can lend out 75% of $300, which is $225. This $225 can be deposited into another chequable account, and the process can continue, leading to a chain reaction. Using the money multiplier formula (1/required reserve ratio), we can see that $225 can lead to an increase in the money supply by $900 ($225 multiplied by 1/0.25). Therefore, the money supply will increase by an additional $900 if the banking system does not hold any excess reserves.

Suppose That the Required Reserve Ratio Is 25% and a Customer