Table 29-9
Metropolis National Bank is currently holding 2% of its deposits as excess reserves.
-Refer to Table 29-9. Metropolis National Bank is currently holding 2% of deposits as excess reserves. Assume that no banks in the economy want to hold excess reserves and that people only hold deposits and no currency. How much does the money supply ultimately increase when Metropolis National Bank lends out its excess reserves?
A)$100,000
B)$110,000
C)$120,000
D)None of the above are correct.

Question

Table 29-9
Metropolis National Bank is currently holding 2% of its deposits as excess reserves. 
-Refer to Table 29-9. Metropolis National Bank is currently holding 2% of deposits as excess reserves. Assume that no banks in the economy want to hold excess reserves and that people only hold deposits and no currency. How much does the money supply ultimately increase when Metropolis National Bank lends out its excess reserves?
A)$100,000 
B)$110,000 
C)$120,000 
D)None of the above are correct.

Quizplus · Accepted Answer

When Metropolis National Bank lends out its excess reserves, the money supply increases by the amount of the loan multiplied by the money multiplier. If the reserve requirement is 10%, the money multiplier is 1/0.10 = 10. Therefore, if the bank lends out $10,000 (2% of $500,000), the money supply increases by $10,000 * 10 = $100,000.

Table 29-9 Metropolis National Bank Is Currently Holding 2% of Its Deposits