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Assume this process continues, with each successive loan deposited into a checking account and no banks keeping any excess reserves. Under these assumptions, the $500,000 injection into the money supply results in an overall increase of ______ in demand deposits.

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emmanuelkossy

Answer:

$2,500,000

Explanation:

Following the stated assumptions in the question, the money multiplier will be used to calculate the resulting effect of the $500,000 injection into the money supply.

The money multiplier formula is 1/r , where r is the required reserve ratio. So, the resulting change in demand deposits is:

Change in Demand Deposits = Change in Fresh Reserves (that is, the Initial Deposit)×1/r

= $500,000×1/0.20

=$500,000 × 5

= $2,500,000

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