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.
1 answer