Suppose the RRR is .5. A $500 cash deposit in a bank would increase the money supply by $__________.
A) 100
B) 500
C) 1000
D) 5000
100
To determine the increase in money supply, we need to use the formula for the money multiplier.
The money multiplier (MM) is the reciprocal of the Reserve Requirement Ratio (RRR). In this case, the RRR is 0.5, so the money multiplier is 1/0.5 = 2.
To calculate the increase in money supply, we need to multiply the cash deposit by the money multiplier.
Increase in money supply = Cash deposit * Money multiplier
= $500 * 2
= $1000
Therefore, the correct answer is C) 1000.
To determine the increase in the money supply resulting from a $500 cash deposit in a bank, we need to calculate the potential money expansion using the reserve requirement ratio (RRR).
The reserve requirement ratio (RRR) is the percentage of total deposits that banks are required to hold in reserve. In this case, the RRR is given as 0.5 (or 50%).
To calculate the money supply increase, we will use the money multiplier formula:
Money Multiplier = 1 / Reserve Requirement Ratio
Money Supply Increase = Cash Deposit × Money Multiplier
First, we can calculate the money multiplier using the given reserve requirement ratio:
Money Multiplier = 1 / 0.5 = 2
Next, we can calculate the money supply increase by multiplying the cash deposit by the money multiplier:
Money Supply Increase = $500 × 2 = $1000
Therefore, the correct answer is C) $1000.