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. If the reserve requirement is 12 %, how much will your deposit increase the total value of checkable bank deposits? $ If the reserve requirement is 4 %, how much will your deposit increase the total value of checkable deposits? $ Increasing the reserve requirement the money supply.

a. $33,333

b. $100,000

c. No, it will not.

Explanation:

a. If the reserve requirement is 12 %, how much will your deposit increase the total value of checkable bank deposits?

Money multiplier = 1/r

Where,

r = reserve requirement = 12%, or 0.12

Therefore, we have:

Money multiplier = 1/0.12 = 8.33 times

This means that my deposit will increase the total value of checkable bank deposits 8.33 times. Therefore, we have:

The total value of checkable bank deposits = $4,000 * 8.33 = $33,333  

Therefore, the deposit will increase the total value of checkable bank deposits by $33,333.33.

b. If the reserve requirement is 4 %, how much will your deposit increase the total value of checkable deposits?

r = 4%, or 0.04

We therefore have:

Money multiplier = 1/0.04 = 25 times

This means that my deposit will increase the total value of checkable bank deposits 25 times. Therefore, we have:

The total value of checkable bank deposits = $4,000 * 25 = $100,000

Therefore, the deposit will increase the total value of checkable bank deposits by $100,000.

c. Will increasing the reserve requirement increase the money supply.

No, it will not.

From the above a and b, we can see that the lower the reserve requirement, the higher the money multiplier; while the higher the reserve requirement, the lower the money multiplier.

Therefore, increasing the reserve requirement will not increase the money supply.

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