Suppose that the required reserve ratio is 20 percent and you ...

[luvbio]

Suppose that the required reserve ratio is 20 percent and you deposit 50,000 of currency into Comerica Bank.
 
  What is the potential increase in deposits in the banking system brought about by your deposit? What is the potential change in the money supply?

Question 2

The multiplier effect following an increase in expenditure is generated by induced increases in consumption expenditure as income rises.
 
  Indicate whether the statement is true or false

[stanleka1]

Answer to Question 1

The simple deposit multiplier is equal to (1/required reserve ratio). In this case it is 1/0.2 = 5. Since the deposit multiplier is 5, then an increase in deposits in the banking system is equal to the multiplier times the initial deposit. This is 5  50,000 = 250,000. To find the change in the money supply, we must then subtract the initial deposit because cash held by the public declines by the size of the initial deposit. Thus the change in the money supply is 250,000 - 50,000 = 200,000.

Answer to Question 2

TRUE

[luvbio]

TYSM

[rachel]

Excellent