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If a country’s required reserve ratio is 8%, when the central bank puts $1,000 of new currency into circulation, by how much can the money supply grow assuming all currency is deposited in a bank and no banks hold excess reserves? Use the simple money multiplier.

Respuesta :

Answer:

$12,500

Explanation:

Given that,

Central bank increases the money supply in circulation by put $1000 of new currency. So,

Deposits = $1,000

Required reserve ratio = 8%

Required reserves = 8% of $1,000

                               = $80

Money multiplier = 1 ÷ Required ratio

                            = 1 ÷ 8%

                            = 12.5

Therefore,

Total change in money supply = Money multiplier × Deposits

                                                   = 12.5 × $1,000

                                                   = $12,500

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