Suppose a commercial banking system has $40,000 of outstanding checkable deposits and actual reserves of $4,500

Economics May 27, 2021

Suppose a commercial banking system has $40,000 of outstanding checkable deposits and actual reserves of $4,500. If the reserve ratio is 10 percent, the banking system can expand the supply of money by the maximum amount of

Expert Solution

Computation of Increase in Money Supply:

Required Reserves = Deposits * Reserve Ratio = $40,000*10% = $4,000

Excess Reserves = Actual Reserves - Required Reserves = $4,500-$4,000 = $500

Multiplier =1/Reserves Ratio =1/10% =10

Increase in Money Supply = Multiplier * Excess Reserve

=$500*10

=$5,000

So, The banking system can increase money supply maximum of $5,000.

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