What is the maximum change in money supply due to the following transaction: http://postimage.org/image/j6hc3mj3z/

Expert Answers

An illustration of the letter 'A' in a speech bubbles

The bank operates in a banking system where the reserve ratio is 6%. This implies that for every $100 deposited with the bank it only has to maintain $6 as cash and the rest can be used in its lending operations to other clients that would like to borrow finds from the bank. A cash reserve ratio less than 1 allows banks to lend to their borrowers an amount larger than what they have received from their depositors and subsequently increases the money supply in the system.

If a client deposits $200 with the bank, it can lend an amount equal to $200/0.06 = $3333.33

The maximum change in money supply stemming from this deposit is equal to $3333.33

Approved by eNotes Editorial Team