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 10 percent, your deposit would initially add ____ to total demand deposits and over time increase the money supply by a maximum of ____.

Question

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Initially, your deposit adds $10,000 to total demand deposits. With a 10 percent reserve requirement, banks can lend out 90% of deposits, creating a potential maximum increase in the money supply through the money multiplier effect of $100,000 (10 times the original deposit, as 1/0.1 = 10).

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