An initial decrease in a bank's reserves will decrease checkable deposits A. by an amount equal to the decrease in reserves. B. by an amount less than the decrease in reserves. C. by an amount greater than the decrease in reserves. D. An initial decrease in reserves will increase checkable deposits.

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Oswaldo Cantu

3 June, 02:05

An initial decrease in a bank's reserves will decrease checkable deposits A. by an amount equal to the decrease in reserves. B. by an amount less than the decrease in reserves. C. by an amount greater than the decrease in reserves. D. An initial decrease in reserves will increase checkable deposits.

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Jose Schneider · Answer 1

C. by an amount greater than the decrease in reserves.

Explanation:

Due to the deposit multiplier which is determined by the required ratio reserve, the amount of checkable deposits decrease much more than the amount of decrease in the reserves.

It works as detailed:

Deposit Multiplier ∆D = (1/rr) * ∆R where the variation of "D" is determined by the "rr" (Ratio Reseserve) times "R" (Changes in Reserves.)

If the "rr" it's keep at the same level then a change in the "R" (Reserves) will have an impact in the "D" (Deposit) multiplied by the "1/rr".