Marketing Money Multiplier Story Problem

Reserve requirement = 10 percent of deposits

a. Amount of deposit = $100

Reserve to be maintained ($ 100 x 10% ) = $ 10

Hence, the Amount available for lending $ 90 to customers by Bank 1.

b. The above $90 are deposited in Bank 2

Amount deposited = $ 90

Reserve requirement ( $ 90 x 10% ) = $ 9

Now amount available with Bank 2 for lending to customers = $ ( 90 - 9 ) = $ 81

c. Calculation of additional dollars of loan created by this Infinite chain of Bank

$100 + $90 + $ 81 + $ 72.9 + $ 65.61+ --------

$ 100 + $ 100 x(0.9) + $ 100 x(0.9)^2 + $ 100 x(0.9)^3 + ----------

a + ar + ar^2 + ar^3 + ----------

from the formula of geometric series, a= Initial amount and r = common ratio

Hence, Additional dollars of loan = 100 / (1 - 0.9) = $ 1000 (Ans)