Suppose that the central bank has increased the money supply

Suppose that the central bank has increased the money supply such that there are an additional $387425 in excess reserves. If the reserve ratio is 8.0 percent, what is the maximum the money supply could increase?

Need step by step solution With Used formula.

Solution

Answer:-

Data Given,

Additional Excess Reserve = $387425

Reserve ratio = 8% = 0.08

Here, We have to find the maximum money supply increased To do So, We will use the following formula:-

The maximum increase in money Supply = Additional excess Reserve * Money multiplier

Where,

Additional excess Reserve = $387425

Money multiplier = 1 / Reserve ratio(Reserve ratio is 8% = 0.08)

Money multiplier = 1 / 0.08

Money multiplier = 12.5

Substituting the Respective value in the formula:-

The maximum increase in money Supply = Additional excess Reserve * Money multiplier

The maximum increase in money Supply = $387425 * 12.5

The maximum increase in money Supply = $4,842,812.5