While cleaning your apartment, you look

under the sofa cushion and find a $50 bill.

You deposit the bill in your checking
account. The Fed’s reserve requirement is
20% of deposits. Answer the following
questions with justification, and submit
your answer under the form of EDP file or
equivalent;
• What is the maximum amount that the

money supply could increase?

Reserve ratio = R = 1/5.
Maximum increase happens when banks hold
no excess reserves.
Then ∆M1 = ∆Checkable deposits +∆Currency
in circulation = (50 x 5) –50 (currency has
dropped because you have deposited the
money) = 200
• What is the minimum amount that the

money supply could increase?

Minimum increase happens when bank hold
100% reserves. ∆M1 = 50–50 = 0