Suppose you found $10,000 hidden under a rock and deposited it in a demand deposit account at your bank.If the reserve requirement was 20 percent, your deposit would add ____ to total demand deposits; the added loans that the banking system as a whole could make as a result of the deposit would generate ____ in additional demand deposits.

Question

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The initial deposit of $10,000 adds $10,000 to total demand deposits. With a reserve requirement of 20%, the bank can lend out 80% of the deposit, which is $8,000. This $8,000 can be re-deposited and re-loaned multiple times, creating a money multiplier effect. The money multiplier is 1/reserve requirement = 1/0.2 = 5. Therefore, the total increase in demand deposits is $10,000 * 5 = $50,000. The additional demand deposits generated by loans are $50,000 - $10,000 = $40,000.

Suppose You Found $10,000 Hidden Under a Rock and Deposited