Table 29-4

-Refer to Table 29-4. Assume the Fed's reserve requirement is 6 percent and all banks besides the Bank of Cheerton are exactly in compliance with the 6 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Cheerton decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?
A)$22,500.00
B)$30,572.69
C)$32,526.93
D)$30,000.00

Question

Table 29-4
  ​
-Refer to Table 29-4. Assume the Fed's reserve requirement is 6 percent and all banks besides the Bank of Cheerton are exactly in compliance with the 6 percent requirement. Further assume that people hold only deposits and no currency. Starting from the situation as depicted by the T-account, if the Bank of Cheerton decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?
A)$22,500.00 
B)$30,572.69 
C)$32,526.93 
D)$30,000.00

Quizplus · Accepted Answer

The money multiplier is 1/0.06 = 16.67. If the Bank of Cheerton uses all its excess reserves to make new loans, the initial increase in loans will be multiplied by the money multiplier. If the initial loan amount is $1,800, the total increase in the money supply will be $1,800 * 16.67 = $30,000.

Table 29-4 ​

Table 29-4