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13 August, 03:57

Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 11%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action

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  1. 13 August, 04:09
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    The largest amount by which the money supply can be increased is $1363.5

    Explanation:

    Checking/Demand Deposit = $150 (which is assumed to be the part of new money supply)

    Required reserve ratio = 11%

    = 0.11

    We, money multiplier = 1 : m

    where,

    m = Demand deposits : Required reserves

    = 0.09

    Money multiplier = 1 : 0.11

    Money multiplier = 9.09

    So, for $150 deposited the money supply will increase by:

    = $ (150 * 9.09)

    = $1363.5

    Therefore, the largest amount by which the money supply can be increased is $1363.5
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