In the link below, how much could the money supply increase as a result of the extra $100,000 deposit? What is the answer to question 1. c) http://postimage.org/image/j6hc3mj3z/
When money is deposited in a bank, the bank is able to use that money to increase the money supply by much more than just the sum that is initially deposited. It is able to do this because it can take the deposit, hold the required reserves, and loan the rest out.
When the bank took in the $100,000, it could hold $4,000 and loan out $96,000 as show in round 1 below. The $96,000 that it loans will then be...
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