Answer:
(1) $5
(2) $25
(3) $50
Money multiplier = 5 times
Explanation:
Initial bank reserves:
= Desired Reserve-deposit ratio × Currency held by public
= 0.2 × $500
= $100
(1) Increase in bank reserves by $1, so
Bank reserve deposit increases from $500 to:
= (Initial bank reserves + $1) ÷ Desired Reserve-deposit ratio
= $101 ÷ 0.2
= $505
Money supply increases by:
= New bank reserve deposit - Currency held by public
= $505 - $500
= $5
(2) Increase in bank reserves by $5, so
Bank reserve deposit increases from $500 to:
= (Initial bank reserves + $5) ÷ Desired Reserve-deposit ratio
= $105 ÷ 0.2
= $525
Money supply increases by:
= New bank reserve deposit - Currency held by public
= $525 - $500
= $25
(3) Increase in bank reserves by $10, so
Bank reserve deposit increases from $500 to:
= (Initial bank reserves + $10) ÷ Desired Reserve-deposit ratio
= $110 ÷ 0.2
= $550
Money supply increases by:
= New bank reserve deposit - Currency held by public
= $550 - $500
= $5 0
Money multiplier = 1 ÷ Desired Reserve-deposit ratio
= 1 ÷ 0.2
= 5 times
