Answer to Question #151003 in Macroeconomics for jay

Question

Assume that the reserve requirement is 2% and that banks are holding excess reserves of 3%. There is no cash held by the
public.
a. Suppose there was $1,000 in cash in the economy and everyone held all of their money as demand deposits. What is
the money supply?

Answer 1

The bank's demand deposits will increase by $1000 ,because demand deposits are one component of the money supply, the increase in demand deposits results in an increase in the money supply.