Economics question The following is with regard to 4) Suppose you deposit $5,000

Question

Economics question

The following is with regard to 4) Suppose you deposit $5,000 in cash into your checking account at Wells Fargo Bank. Assume that Wells Fargo Bank has no excess reserves at the time you make your deposit and that the required reserve ratio is 10%. Suppose that Wells F makes the maximum loan they can from the funds you deposited. What is the maximum increase in checking account deposits that can result from your $5,000 deposit? What is the maximum increase in the money supply? Explain.

Explanation / Answer

The funds deposited = $5000 So checking deposits will go up by $5000.

Reserves kept = 0.10*5000 = $500

Deposits for Loans = 5000 - 500 = $4500

The money supply can increase with $4500 will be = 1/0.10*4500 = $45,000 This is the maximum extent of increase in money supply due to increase in loanable funds of $4500 or checking deposits of $5000 with 10 percent reserve ratio.

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