A deposit of S4000 is made in a \"first-generation\" bank in a many-bank system

Question

A deposit of S4000 is made in a "first-generation" bank in a many-bank system with a 5 percent resents requirement. How much can this bank lend and still meet the reserve requirement? What is the total maximum expansion of the money supply that will occur after all banks in the system have finished with the credit-expansion process? What would be your answers to the above questions if all banks wish to carry 20 percent additional excess reserves? What would be your answers if, in addition to the 20 percent excess reserves, somewhere along the chain of deposit expansion S1000 is removed from the banking system and placed in a cookie jar?

Explanation / Answer

a) Reserve = Deposits* required reserve = 4000*0.05 = $200

b) Money multiplier = 1/0.05 = 20 so Increase in money supply = 20*3800 = $76000

c) If the reserve is 5+20 = 25% then reserve = 4000*0.25=1000

Money multiplier = 1/0.25 = 4 so Increase in money supply = 4*3000 = $12000

d) If deposit is now $3000

If the reserve is 5+20 = 25% then reserve = 3000*0.25=750

Money multiplier = 1/0.25 = 4 so Increase in money supply = 4*2250 = $9000

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