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What is the effect on the money supply

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Question - Suppose the public wishes to hold $0.20 in pocket money and $0.25 in time deposits. For each dollar of deposits created, $0.04 finds its way outside the domestic banking system. Depository institutions plan to keep $0.10 in excess reserves for each dollar of transaction money received. Reserve requirements on transaction deposits and time and savings deposits are 8 percent and 4 percent, respectively. Suppose $3.75 million in new excess reserves appear in the banking system. What is the effect on the money supply?

Reference no: EM133185563

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