3. If the banking system has $500,000 in demand deposit liabilities, S125,000 in

Question

3. If the banking system has $500,000 in demand deposit liabilities, S125,000 in total reserves and a reserve requirement of 15%; What is the maximum amount by which the money supply in the economy can be increased by? 4. The money multiplier process gives us an idea of the maximum possible expansion in the economy's money supply. Can you think of a reason why the money supply might not expand to the maximum possible extent? Think of some of the events that have occurred in recent years during the Great Recession in the credit markets and business community to help you develop your answer.

Explanation / Answer

(3)

Required reserves ($) = Demand deposits x Reserve requirement = 500,000 x 15% = 75,000

Excess reserves ($) = Total reserves - Required reserves = 125,000 - 75,000 = 50,000

Maximum increase in money supply ($) = Excess reserves / Required reserves ratio = 50,000 / 0.15 = 333,333

NOTE: As per Chegg answering guideline, first question is answered.

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