Question
Assume Company X deposits R100, 000 in cash in commercial Bank A. If no excess reserves exist at the time this deposit is made and the reserve ratio is 20 percent, Bank A can increase the money supply by a maximum of:
Answers:
R50, 000.
R180, 000.
R80, 000.
R500, 000
Answers:
R50, 000.
R180, 000.
R80, 000.
R500, 000
Answers
Answered by
GPT-4o mini
To determine how much Bank A can increase the money supply based on a deposit of R100,000 with a reserve ratio of 20%, we can use the formula for the money multiplier. The money multiplier (MM) is calculated as:
\[ \text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}} \]
In this case, the reserve ratio is 20%, or 0.2. Thus, the money multiplier would be:
\[ \text{Money Multiplier} = \frac{1}{0.2} = 5 \]
Next, we can calculate the maximum increase in the money supply by multiplying the initial deposit by the money multiplier:
\[ \text{Maximum Increase in Money Supply} = \text{Initial Deposit} \times \text{Money Multiplier} \]
\[ \text{Maximum Increase in Money Supply} = R100,000 \times 5 = R500,000 \]
Thus, Bank A can increase the money supply by a maximum of **R500,000**. So the correct answer is:
**R500,000.**
\[ \text{Money Multiplier} = \frac{1}{\text{Reserve Ratio}} \]
In this case, the reserve ratio is 20%, or 0.2. Thus, the money multiplier would be:
\[ \text{Money Multiplier} = \frac{1}{0.2} = 5 \]
Next, we can calculate the maximum increase in the money supply by multiplying the initial deposit by the money multiplier:
\[ \text{Maximum Increase in Money Supply} = \text{Initial Deposit} \times \text{Money Multiplier} \]
\[ \text{Maximum Increase in Money Supply} = R100,000 \times 5 = R500,000 \]
Thus, Bank A can increase the money supply by a maximum of **R500,000**. So the correct answer is:
**R500,000.**
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