Suppose you found $1,000 hidden in your mattress and deposited it in a demand deposit account at your bank. If the reserve requirement was 20 percent, the deposit would directly create ____ in excess reserves and ultimately lead to a ____ total increase in the money supply, if all banks in the system lend out 100 percent of their excess reserves.

Question

Quizplus · Accepted Answer

The deposit of $1,000 would create $800 in excess reserves, which is the amount of the deposit minus the required reserve of 20%. If all banks in the system lend out 100% of their excess reserves, this would lead to a total increase in the money supply of $5,000 (the deposit multiplied by the reciprocal of the reserve requirement, 1/0.2 = 5). Therefore, the correct answer is B.

Suppose You Found $1,000 Hidden in Your Mattress and Deposited