Table 10-3
The following information pertains to the Bank of Edmonton.

-Refer to the Table 10-3.Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency.If the Bank of Edmonton decides to hold exactly 5 percent in reserves,by how much would the economy's money supply increase?
A)$500
B)$1000
C)$1500
D)$2000

Question

Table 10-3
The following information pertains to the Bank of Edmonton.
 
-Refer to the Table 10-3.Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency.If the Bank of Edmonton decides to hold exactly 5 percent in reserves,by how much would the economy's money supply increase?
A)$500 
B)$1000 
C)$1500 
D)$2000

Quizplus · Accepted Answer

The Bank of Edmonton currently holds $4000 in reserves, which is $1000 more than the required reserve ratio of 5%. If they decide to hold exactly 5% in reserves, they can release $1000 into the economy as excess reserves. Since the required reserve ratio is 5%, the money supply can increase by a maximum of $1000/0.05 = $20,000. However, we do not know how much of the excess reserves will be lent out, so we cannot determine the exact amount by which the money supply will increase. Therefore, the best choice is B, which represents the maximum potential increase in the money supply.

Table 10-3 The Following Information Pertains to the Bank of Edmonton