Bank+reserves+increase+by+$5,000+when+the+rrr+is+15%.+if+the+banks+hold+an+additional+1%+as+excess+reserves,+by+$2083.33+the+money+supply+increase.
M = (1/(rr + er))*H
where H = Monetary base = Currency + Reserves , er = excess reserve ratio , rr = required reserve ratio.
If Reserves increases by 5000 => H will also increase by 5000 => ΔΗ = 5000 AM = (1/(er +rr))* 5000 Initially, er = 1% = 0.01 and rr = 15% = 0.15
=> ΔΜ = (1 (0.01 + 0.15)) * 5000
=> ΔΜ = 31250
Hence Initially Money supply will increase by 31250
Now er = 0
=> ΔΜ = (1 (0 + 0.15)) * 5000
=> AW=3333333
Hence Now, the Money supply will increase by 33333.33
Thus, If the bank changes the excess reserve ratio from 1% to 0%, then the money supply will increase by 33333.33 - 31250 = $2083.33.
Hence, If the bank changes the excess reserve ratio from 1% to 0%, then the money supply will increase by $2083.33.
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