Table 11-5.

-Refer to Table 11-5. Assume the Fed's reserve requirement is 9 percent and all banks besides the Bank of Pleasantville are exactly in compliance with the 9 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Pleasantville decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?
A) $555.00.
B) $1,200.00.
C) $1,777.78.
D) $2,222.22.

Question

Table 11-5.
 
-Refer to Table 11-5. Assume the Fed's reserve requirement is 9 percent and all banks besides the Bank of Pleasantville are exactly in compliance with the 9 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Pleasantville decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?
A) $555.00. 
B) $1,200.00. 
C) $1,777.78. 
D) $2,222.22.

Quizplus · Accepted Answer

The money multiplier is 1/0.09 = 11.11. If the Bank of Pleasantville uses all its excess reserves to make loans, the money supply increases by the amount of the loans multiplied by the money multiplier. If the excess reserves are $200, the increase in the money supply is $200 * 11.11 = $2,222.22.

Table 11-5. -Refer to Table 11-5. Assume the Fed's Reserve Requirement Is