Suppose you found $2,000 hidden in your mattress and deposited it in a demand deposit account at your bank. If the reserve requirement was 25 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 creates $1,500 in excess reserves because the bank must keep 25% ($500) as required reserves. The total increase in the money supply would be $8,000, as the initial $2,000 can be multiplied by the money multiplier (1/0.25 = 4), leading to a total increase of $8,000.

Suppose You Found $2,000 Hidden in Your Mattress and Deposited