Question

2. You take $100 you had kept under your mattress and deposit it on your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10% of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase?

Answer 1

If you take $100 that you held as currency and put it into the banking system, then the total amount of deposits in the banking system increases by $1,000, because a reserve ratio of 10% means the money multiplier is 1 / .10 = 10. Thus, the money supply increases by $900, because deposits increase by $1,000 currency declines by $100.

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