(scenario: assets and liabilities of the banking system)
look at the scenario assets and liabilities of the banking system.
if the reserve ratio is 9% and the banking system does not want to hold excess reserves, how much more can be added to the money supply?
a. $1 million
b. $250,000
c. about $111,000
d. about $667,000

the value of deposit is not given

Explanation:

The reserve ratio gives the percent of deposits that banks must hold as reserves.

The required reserve ratio is 9 percent which means that banks must hold 9 percent of their deposits as required reserves. Since the amount deposit is not given, let us say, the deposits are $2million, then $180 thousand;

($2 million x 0.09) must be held as required reserves.

EXCESS reserves are reserves over and above required reserves. ASSUMING that the total reserves are $ 300 thousand and required reserves is $180 thousand, then EXCESS reserves are $120 thousand( that is $300 thousand minis million less $180 thousand).

If the banking system were to loan out its entire excess reserves, the MONEY SUPPLY would EXPAND initially by $120 thousand.

But, as this money circulates through the system, there would be further increases in the money supply. Which can be calculated using;

ADD = AER/r.

Where ADD=expansion of demand deposits, AER = excess reserves in the banking system, and r= required reserve ratio. Thus, with the example above; deposited money can expand by;

120,000/0.09

= $ 1333333.33.

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