Assume the fed’s reserve requirement is 5 percent and all banks besides the bank of pleasantville are exactly in compliance with the 5 percent requirement. further assume that people hold only deposits and no currency. starting from the situation as depicted by the t-account, if the bank of pleasantville decides to make new loans so as to end up with no excess reserves, then by how much does the money supply eventually increase?

The correct answer is $10.000.

Explanation:

The monetary reserve is a set of funds represented in currency, money or similar, saved as a forecast of eventual needs or for legal or contractual reasons (for contracts). There are many types of reserves represented in money or similar, however, in the economic issue, we can identify two main classes of reserves that are a fundamental part of the current economic and financial system.

Bank reserves: the federal reserve establishes a minimum amount of money that financial institutions must maintain permanently and cannot use for other activities; This guarantees that banks can return their savings to savers if they request them or money problems are presented to these institutions; that is, bank reserves (reserve requirements) are a percentage of the total deposits received by financial institutions, a percentage that must be kept in cash in their boxes or in their accounts in the federal reserve. The international monetary reserves: correspond to a certain amount of resources that the countries possess and that are used to fulfill, mainly, international commitments. These are mainly represented in foreign currencies and other assets such as gold. They can also be used by the federal reserve to intervene in the exchange market and defend the exchange rate when necessary; that is, to prevent the Colombian peso from losing or gaining a lot of value compared to other foreign currencies.

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