If the required reserve ratio is 10% and $1,000 of new bank reserves are created by the Federal Reserve, what is the maximum potential increase in the quantity of money in the economic system (not just the money created by the banking system but the total money supply)? Why might the money supply not increase by the maximum possible amount? Make sure you show your calculations and answer both parts of this question. Use the following equation to answer this question:
Maximum Potential Increase in the Money Supply = (1/r) x Monetary base (i.e. sum of currency in circulation and bank's reserve balances), where r is the required reserve ratio.