Which of the following would create the most money? the initial deposit is $6,500 and the required reserve ratio is 20 percent. the initial deposit is $3,000 and the required reserve ratio is 10 percent. the initial deposit is $7,500 and the required reserve ratio is 25 percent. the initial deposit is $4,500 and the required reserve ratio is 15 percent.
Calculate the money multiplier
= 1/ reserve ratio
reserve ratio = 15% = 0.15
therefore the money multiplier = 1/0.15 = 6.6666 ≈ 6.67
to calculate the maximum increase in money supply would be
money multiplier * excess reserve added
6.67 * $231115 = $1541537.05
since there is an increase in money supply by the central bank and this resulted in an additional $231115 in excess reserve hence the maximum increase in money supply will be $1541537.05
The formula to compute the required reserve ratio is shown below:
Required reserve ratio = (Required reserves maintained) ÷ (Deposit of Bank)
15% = ($225,000,000) ÷ (Deposit of Bank)
So, the deposit of the bank would be
= ($225,000,000) ÷ (15%)
The required reserve ratio shows a relationship of maintaining the required reserve and the deposit of bank
Since the central bank has increased the money supply by $231115 but the reserve ratio is maintained at 15%, this means that 85% of the money is being injected in the form of money supply.
Hence, the maximum increase in money supply, the 85% of $231115 is: $196448.
Hope this helps.
Thank you and Good luck.
A(1): If the required reserve ratio is 15 percent, the largest possible increase in the money supply that could result is $200 million, and the smallest possible increase is $30 million.
Given; Reserve ratio=15%=0.15
Increase in deposits = Money multiplier*Deposit
Increase in deposits =(1/ Reserve ratio)*Deposit
Increase in deposits =(1/0.15)*30,000000
Increase in deposits=6.667*30000000
Increase in deposits =$200,000000
The smallest possible increase is the $30,000000 held as reserves.
with 100 million in checking account, and required reserve ratio in 10%
the bank need to hold 10 millions
IFthe Federal Reserve raises the required reserve ratio to 15% then it will need hold 15 millions
This bank has none excess reserves
B. Required reserve = $30 million, Excess reserve = $10 million.
The statement is true because if the bank has vast capital, It can further reinvest that capital into various businesses. If it can reinvest the money, the bank can earn more revenues. More earnings of the bank lead to enable the confidence of the investors as the bank can provide more dividends to its shareholders.
Required reserve = Deposits × Required Reserve Ratio
Deposits = $200 million
Required Reserve Ratio = 15%
Therefore, Required reserve = $200 × 15%
Required reserve = $30 million
From the balance sheet, we can say that there is an excess reserve.
Excess reserve = Reserves - Required reserve
Excess reserve = ($40 - $30) million.
Excess reserve = $10 million.
a. 200 million
b. 30 million
The answer and procedures of the exercise are attached in the image below.
Please consider the data provided by the exercise. If you have any question please write me back. All the exercises are solved in a single sheet with the formulas indications.
If the required reserve ratio is 15 percent, the largest possible increase in the money supply that could result is $200 million, and the smallest possible increase is $30 million.
In order to determine the largest possible increase in the money supply we have to determine the money multiplier. The money multiplier measures the banks' capacity to "create" money by lending it.
Money multiplier = 1 / reserve ratio = 1 / 15% = 6.667
maximum increase in money supply = inflow of funds x money multiplier = $30 million x 6.667 = $200 million.
The banking system creates money by first receiving deposits, e.g. you deposit $1,000 in your savings account, and then lending money to another client. The bank will lend $850 (-15% required reserve) to John that will purchase a bike. The seller of the bike receives the money form John and deposits the $850 in his own bank. Then this second bank will lend $722.50 to Sarah. Sarah will use the money to purchase a new computer and a printer from Tom. Tom then deposits the money in his bank, and then his bank lends $614 to Sally, and the wheel goes on and on.
Assuming that the banks decide to not lend any portion of the $30 million to their clients and instead uses them to increase their reserves, the smallest possible increase in the money supply would be the $30 million.
This money creating process is possible because we use a fractional banking system, which means that the banks are only required to keep a fraction of total deposits as reserves.
Kindly check explanation
Excess reserve = (Actual reserve - required reserve)
Required reserve = reserve ratio × Checkable deposit
Required reserve = 0.25 × $400 billion
Required reserve = $100 billion
Excess reserve = $96 - $100 = - $4billion
B) money multiplier = 1/ required reserve ratio
1/0.25 = 4
Maxumum amount that can be Lent = 4 × 4 = $16 million
If reserve ratio = 15%
Required reserve = 0.15 × $400 billion = $60 billion
Excess reserve = $96 - $60 = $36 billion
Monetary multiplier = 1/ 0.15 = 6.667
Maximum amount of loan = 6.667 × 36 = $240 billion
maximum amount money supply increase is $200 million
smallest possible amount money supply increase is $30 million
purchase government bonds = $30 million
reserve ratio = 15 percent
to find out
largest possible increase in the money and smallest possible increase
we know that here money multiplier will be
money multiplier =
money multiplier =
money multiplier = 6.7
change in money supply will be
change in money supply = money multiplier × purchase bonds
change in money supply = 6.67 ×30
change in money supply = $200 million
so maximum amount money supply increase is $200 million
when bank hold $30 million as reserve
than money supply increase by $30 million
so smallest possible amount money supply increase is $30 million