the balance sheet of the iron bank is given below. the reserve requirement is 20%. assets | liabilities…

the balance sheet of the iron bank is given below. the reserve requirement is 20%. assets | liabilities reserves: $6,000 | demand deposits: $30,000 loans $24,000 | owners equity: $0 if hodor deposits $500 in the iron bank, what is the maximum change in the money supply that can occur as a result of his deposit? choose 1 answer: a $500 b at most, the money supply will increase by $2,000. c there will be no change in the money supply. d at most, the money supply will increase by $2,500. e $30,000

the balance sheet of the iron bank is given below. the reserve requirement is 20%. assets | liabilities reserves: $6,000 | demand deposits: $30,000 loans $24,000 | owners equity: $0 if hodor deposits $500 in the iron bank, what is the maximum change in the money supply that can occur as a result of his deposit? choose 1 answer: a $500 b at most, the money supply will increase by $2,000. c there will be no change in the money supply. d at most, the money supply will increase by $2,500. e $30,000

Answer

Explanation:

Step1: Calculate the money - multiplier

The money - multiplier formula is $m=\frac{1}{r}$, where $r$ is the reserve - requirement ratio. Given $r = 0.2$, then $m=\frac{1}{0.2}=5$.

Step2: Calculate the change in money supply

The change in money supply $\Delta M$ is given by the formula $\Delta M=m\times\Delta D$, where $\Delta D$ is the change in deposits. Here, $\Delta D = 500$. So, $\Delta M=5\times500 = 2500$.

Answer:

D. At most, the money supply will increase by $2,500.