Suppose that you take $150 in currency out of your pocket and deposit it in your checking account. If the required reserve ratio is 8%, what is the largest amount (in dollars) by which the money supply can increase as a result of your action? Include the $150 as part of the new money supply and assume the bank does not hold excess reserves. Give your answer to two decimals.

The largest amount by which the money supply can increase is $1,875

Explanation:

According to the given data, we have the following:

Checking/Demand Deposit = $150 (which is assumed to be the part of new money supply)

Required reserve ratio = 8% = 0.08

Therefore, first we need to calculate the money supplier as follows:

Money multiplier 1/rr

Money multiplier = 1/0.08

Money multiplier = 12.5

Hence for $150 deposited the money supply will increase by $(150×12.5) =$1,875

The largest amount by which the money supply can increase is $1,875