Answer to Question #146322 in Microeconomics for Beverly Jeff

Question

You deposit a $1,000 scholarship check in the bank. If the required reserve ratio is 10 percent, explain how the banking system will create new money and how much money can potentially be created.

Answer 1

Money Multiplier= $1/reserve ratio$

This means that for every $\$1$ increase of deposits leads to a $\$$ ($1/$ reserve ratio) increase in money supply.

The money multiplier can be used to determine the total increase in money supply:

Total Increase in Money supply= Money Multiplier $\times$ Deposit.

Initial deposit = $\$$ 1,000

Reserve ratio=10$\%$

Money multiplier= 1$/0$ .10=10

Increase in money supply = $\$$ 1000 $\times$ 10=$\$$ 10,000.