 If Sarah deposits $20,000 in the Lawrence National Bank (LNB) and the reserve requirement is 10 percent, then the potential expansion of the money supply resulting from this transaction is:  

The potential expansion of the money supply is determined by the **money multiplier**, which is the inverse of the reserve requirement. The formula to calculate the potential expansion is:

\[
\text{Money Multiplier} = \frac{1}{\text{Reserve Requirement}}
\]

Given a reserve requirement of 10% (or 0.10), the money multiplier is:

\[
\frac{1}{0.10} = 10
\]

Now, to find the potential expansion of the money supply, multiply the initial deposit by the money multiplier:

\[
\text{Potential Expansion} = 20,000 \times 10 = 200,000
\]

Thus, the potential expansion of the money supply is **$200,000**.

Would you like further details or have any questions?

Here are 5 related questions to explore:
1. How does changing the reserve requirement affect the money multiplier?
2. What assumptions are made when calculating the maximum potential expansion of the money supply?
3. How would the expansion differ if the reserve requirement were 20% instead of 10%?
4. What is the role of excess reserves in limiting the money supply expansion?
5. How does the Federal Reserve use reserve requirements to control the money supply?

**Tip:** The money multiplier effect assumes that banks loan out all their excess reserves, which isn't always the case in practice.

If Sarah deposits $20,000 in the Lawrence National Bank (LNB) and the reserve requirement is 10 percent, then the potential expansion of the money supply resulting from this transaction is:

Learn how to calculate the potential expansion of the money supply when Sarah deposits $20,000 in the Lawrence National Bank with a 10% reserve requirement. Explore key concepts such as the money multiplier and money supply expansion, with a detailed step-by-step solution. Ideal for college-level economics and finance students.

Math Problem Statement

Solution

Ask a new question for Free

By Image

Math Problem Analysis

Mathematical Concepts

Formulas

Theorems

Suitable Grade Level

Related Recommendation