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10 April, 10:35

The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. What is the maximum possible expansion in the money supply as a result of this initial deposit? a.$1,000b.$1,800c. 54,000d.$5,000

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  1. 10 April, 10:55
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    d.$5,000

    Explanation:

    In order to find the maximum amount of possible expansion in the money supply we will have to find the money multiplier. The formula for the money multiplier is

    1/reserve ration = 1/0.2=5

    Now that we know that the multiplier is 5 we will multiply is by 1000 which is the initial deposit, to get the total possible expansion in the money supply, 1000*5 = 5000
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