Question

1. a) If we know that the required reserve ratio is 3% and that banks are not holding reserves in excess of required reserves how much would we expect a $500,000 increase in reserves to increase our money supply?
b) If we know that the required reserve ratio is 3% and that banks are holding 3% of deposits in the form of reserves in excess of required reserves how much would be expect a $500,000 increase in bank reserves to increase our money supply?

Answer 1

Required reserve ratio is 3%. This gives money multiplier as 1/0.03 or 33.33333. there are no excess reserves. The maximum increase in the money supply will be increase in reserves X multiplier or 500,000*33.3333 = 16,666,667

In this case now the money multiplier is 1/6% or 16.66667. therefore the new money supply will be increased by 500000*16.666667 = 8,333,333.