Question

In: Economics

Assume that $1.4 million is deposited into a bank with a reserve requirement of 15 percent....

Assume that $1.4 million is deposited into a bank with a reserve requirement of 15 percent.

Instructions: Round your answer to two decimal places.

a. What is the money supply as a result?

b. If the government decides to raise the reserve requirement to 20 percent, what is the value of the money supply in this case?

Expert Solution

Solution:-

Reserve requirement and money supply:

a. Calculating the change in the money supply:

Deposit in a bank = $1.4 million

Reserve requirement = 15%

Money multiplier = 1 / Reserve requirement

= 1 / 0.15

= 6.666 = 6.67

Therefore increase in money supply = $(6.67*1.40) million

= $ 9.338 million

(B). New change in money supply:

Deposit in bank = $1.4 million

Reserve requirement = 20% = 0.20

Money multiplier = 1 / reserve requirement

= 1 / 0.20

= 5

Therefore increase in money supply = $(5 * 1.40) million = $ 7 million

Rahul Sunny answered 2 years ago

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