At one time the country of Aquilonia had no banks but had cu

At one time, the country of Aquilonia had no banks, but had currency of $10 million. Then a banking system was established with a reserve requirement of 20 percent. The people of Aquilonia deposited half of their currency into the banking system. If banks do not hold excess reserves, what is Aquilonia\'s money supply now?

Solution

Answer: $9 million

Total currency in country : $10 million
Total bank deposits : 10/2 = $5 million
Required reserve =20% of $5 million = $1 million.

As bank doesn\'t hold excess reserve, it will lend all the deposits except required reserve.
Hence total money supply of country will be $9 million ( $5 + $4)