Question

You just deposited $4,000 in cash into a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar.

Required:
a. If the reserve requirement is 16%, how much will your deposit increase the total value of checkable bank deposits?
b. If the reserve requirement is 7%, how much will your deposit increase the total value of checkable bank deposits

Answer 1

Answer:

$25000

$57142.857

Explanation:

Given that :

Amount deposited = $4000

A.) reserve requirement = 16%

The total value of checkable bank deposit is given by ;

Money multiplier * Amount deposited

Money multiplier = 1 ÷ reserve requirement

Hence ;

(1 / 0.16) * 4000

= 6.25 * 4000 = $25000

B.) Reserve requirement of 7%

Money multiplier * Amount deposited

= (1 ÷ 0.07) * 4000

= $57142.857