Suppose that all banks keep only the minimum reserves required by law and that there are no currency drains. The legal reserve requirement is 10 percent. If Maggie deposits the $100 bill she received as a graduation gift from her grandmother into her checking account, the maximum increase in the total money supply will be

The answer is $900

Explanation:

Money supply is the total value of money available in an economy at a particular time i. e the total amount of money in an economy at a particular time. A decrease in the reserve ratio leads to an increase in the money supply and an increase in the reserve ratio leads to a decrease in the money supply.

Money multiplier is 1/required reserve ratio

=1/0.1

10

Money supply will be 1 - 10 = 9

Therefore, increase in money supply will be:

new reserves/deposit x money supply

$100 x 9

=$900