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calculation of the value of the simple deposit expansion multiplier

The required reserve ratio is 5%

Assets: Liabilities:

Cash- $24 mil Demand Deposits- $180 mil
Deposits w/ Fed.- $16 mil Time deposits- $10 mil
Loan- $100 mil Capital- $10 mil
Treas. Securities- $60 mil

So I got the following:

Level of reserves is $40 mil.
The reserve ratio is 40/180 or 2/9
The required reserves are $9 mil.
The level of excess reserves are $31 mil.

I got this far, but my last question asks what the value of the simple deposit expansion multiplier is. I think it is 1/0.05 or 20. But then the question asks if the excess reserve goes to 0 then what is the maximum amount by which the money supply can increase is. I have tried to figure it out, but can't. Can you show me how and why,, and if I got the first part correct? This is due tomorrow and I have tried for 2 days to figure it out. I give up!

Solution Preview

Your calculation of the value of the simple deposit expansion multiplier is correct. It is M=1/0.05 = 20
<br>When the ...

Solution Summary

A calculation of the value of the simple deposit expansion multiplier is depicted.

$2.19