# Change in money supply

Suppose a bank makes a loan of $1M to someone taking out a mortgage to buy a house by crediting that person's bank account with a deposit equal to the size of the mortgage. Suppose the required reserve ratio is 10%. a)How much has the money supply increased by? b)Does reserve or high powered money change? Why or why not? What I did: $$\frac{1M}{0.10}$$ =$10M (this will be the increase in money supply)

Because the reserve ratio is 10%, the reserve money changes by 10% of 10,00,000 = 1,00,000

Is this correct?

A) The money supply only increased by $1 million, since that is the increase in deposits. B) Reserves are deposits at the central bank. A private bank extending a loan to a customer does not create a deposit at the central bank (or government-issued notes and coins). The bank would have to either have \$100,000 in excess reserves before making the loan, or borrow the reserves.