Assume that $1.6 million is deposited into a bank with a reserve requirement of 5 percent. Instructions: Round your answer to two decimal places. a. What is the money supply as a result

Answer: $32 million

Explanation:

Money supply = deposits * (1 / % of reserve requirement)

Hence:

1600000 * (1/0.05) = 32,000,000

money supply = 32 million

Explanation:

The reserve requirement is the money banks keep in their vaults against the deposited money.

The supply of money is affected by reserves and the supply of money can be increased if we lower the reserve requirements.

The money supply is calculated as

money supply = deposits*money multiplier

Where money multiplier is (1 / % of reserve requirement)

money supply = deposits * (1 / % of reserve requirement)

money supply = 1600000 * (1/0.05)

money supply = 32000000

money supply = 32 million