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 holding 2% of its deposits as excess reserves. Assume that no banks in the economy want to maintain holdings of excess reserves and that people only hold deposits and no currency. The Fed makes open market purchases of $10,000. The person who sold bonds to the Fed deposits all the funds in Metropolis National Bank. If the bank now loans out all its excess reserves, by how much will the money supply increase?
A)$190,000
B)$200,000
C)$240,000
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 holding 2% of its deposits as excess reserves. Assume that no banks in the economy want to maintain holdings of excess reserves and that people only hold deposits and no currency. The Fed makes open market purchases of $10,000. The person who sold bonds to the Fed deposits all the funds in Metropolis National Bank. If the bank now loans out all its excess reserves, by how much will the money supply increase?
A)$190,000 
B)$200,000 
C)$240,000 
D)None of the above are correct.

Quizplus · Accepted Answer

The initial deposit of $10,000 increases the bank's reserves. With a reserve requirement of 10%, the money multiplier is 10. Thus, the total increase in the money supply is $10,000 * 10 = $100,000. Since the bank initially held 2% as excess reserves, it can now loan out the full amount, leading to a total increase of $200,000 in the money supply.

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