Question
The central bank sets a reserve requirement of 27%. A commercial bank receives a deposit of R94865. Calculate the potential increase in the money supply
Answers
GPT-4o mini
To calculate the potential increase in the money supply based on a reserve requirement, we can use the money multiplier formula. The money multiplier (MM) is given by the formula:
\[
\text{Money Multiplier (MM)} = \frac{1}{\text{Reserve Requirement}}
\]
In this case, the reserve requirement is 27%, or 0.27 in decimal form. Therefore, the money multiplier can be calculated as follows:
\[
MM = \frac{1}{0.27} \approx 3.70
\]
Next, we multiply the initial deposit by the money multiplier to find the potential increase in the money supply:
\[
\text{Potential Increase in Money Supply} = \text{Deposit} \times \text{Money Multiplier}
\]
Substituting the values:
\[
\text{Potential Increase in Money Supply} = R94865 \times 3.70 \approx R350,000.50
\]
Thus, the potential increase in the money supply, assuming that all the new deposits are loaned out, is approximately **R350,000.50**.
\[
\text{Money Multiplier (MM)} = \frac{1}{\text{Reserve Requirement}}
\]
In this case, the reserve requirement is 27%, or 0.27 in decimal form. Therefore, the money multiplier can be calculated as follows:
\[
MM = \frac{1}{0.27} \approx 3.70
\]
Next, we multiply the initial deposit by the money multiplier to find the potential increase in the money supply:
\[
\text{Potential Increase in Money Supply} = \text{Deposit} \times \text{Money Multiplier}
\]
Substituting the values:
\[
\text{Potential Increase in Money Supply} = R94865 \times 3.70 \approx R350,000.50
\]
Thus, the potential increase in the money supply, assuming that all the new deposits are loaned out, is approximately **R350,000.50**.