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Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 11%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action

Respuesta :

The largest amount by which the money supply can be increased is $1363.5

Explanation:

Checking/Demand Deposit = $150 (which is assumed to be the part of new money supply)

Required reserve ratio = 11%

                                      = 0.11

We, money multiplier = 1 ÷ m

where,

m = Demand deposits ÷ Required reserves

   = 0.09

Money multiplier = 1 ÷ 0.11

Money multiplier = 9.09

So, for $150 deposited the money supply will increase by:

= $(150 × 9.09)

= $1363.5

Therefore, the largest amount by which the money supply can be increased is $1363.5