(3/21/16)
Jimmy Tran deposits $1,000 in cash into Happy Bank. The reserve requirement is 20%. Happy Bank has no excess reserves.
a) What is the immediate effect on the MS?
- N/A
b) What is the max increase on MS that can be made by Happy Bank?
- 1,000 x .20 = 200
1,000 - 200 = 800
c) What is the maximum effect on the MS by the entire banking system?
- 1/.2 = 5
800 x 5 = 4,000
d) Why won't the MS be increasing by its theoretical max amount?
- The bank will fold.
Omg, this is really helpful. The fact that you gave us an example and answer them step by step. I would get confused with finding MS max effect and max increase. Now I know that finding the max effect I will need to use the money multiplier: the entire banking system is finding the total money supply.
ReplyDelete