Answer: Money supply will increase by $54,000
Explanation:
Required reserve ration or r= 10% = 0.10
Initial deposits = $5400
We use the money multiplier formula to find out the value of the multiplier. It is given by,
[tex] m=\frac{1}{r} =\frac{1}{0.10} =10 [/tex]
Money multiplier shows us how much does the supply of money change for a change in the deposits. So, using the value of the multiplier = 10, we have change in money supply of,
[tex] m=\frac{Change in Money supply}{Change in deposits} [/tex]
[tex] 10=\frac{Change in money supply}{$5400} [/tex]
[tex] Change in money supply = $5400*10=$54,000 [/tex]
Thus, the money supply in the economy will increase by $54,000
