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The reserve requirement is 20%. Leroy receives $1,000 as a graduation present and deposits the money in his checking account. The bank does NOT want to hold excess reserves. Reference: Ref 14-5 (Scenario: Money Creation) Look at the scenario Money Creation. Immediately after the deposit, reserves _____ and demand deposits _____ by $1,000. Group of answer choices

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Solution :

Given :

Reserve requirement = 20 %

Leroy receives = $1000

So the bank can hold [tex]$20\%$[/tex] of [tex]$1000$[/tex] as a reserve. That means, it is has to hold [tex]$200$[/tex] as reserves. So it can lend the remaining [tex]$800$[/tex].

[tex]$\text{Multiplier} = \frac{1}{\text{required reserve ratio}}$[/tex]

               [tex]$=\frac{1}{0.2}$[/tex]

               = 5

Thus, the maximum expansion of money supply =  800 x 5

                                                                                = 4000

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