Question
Suppose banks keep no excess reserves and no individuals or firms hold on to cash. Someone suddenly discovers $12 million in buried treasure and deposits
Suppose banks keep no excess reserves and no individuals or firms hold on to cash. Someone suddenly discovers $12 million in buried treasure and deposits it in a bank that has a required reserve ratio of 10%. The deposit will result in an increase in the money supply by 120 million.
Suppose instead that the reserve ratio were 25%. Then the $12 million deposit would result in the money supply bymillion.
If the reserve ratio were 100%, instead of 10%, the money supply would bymillion.
As the reserve ratio gets larger, changes in reserves result in changes in the money supply.
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