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6 October, 11:47

Suppose you have $8,000 in your checking account. You withdraw $500 cash from your account and hide it under your pillow for future use. If the required reserve ratio is 10%, then what will be the maximum impact on money supply today as a result of your action

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  1. 6 October, 13:17
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    the money supply decreases = $4,500

    Explanation:

    The calculation of given question is given below:-

    Money multiplier = 1 : Required reserve ratio

    = 1 : 0.1

    = 10

    Deposited amount = $8,000

    Required Reserve ratio = 10%

    Reserve = deposited amount * money multiplier

    = $8,000 * 0.1

    = $800

    Loaned amount by the bank = deposited amount - Reserve

    = $8,000 - $800

    = $7,200

    So, Money supply = money multiplier * monetary base

    = 10 * $7,200

    = $72,000

    Before withdrawal the money supply = $72,000

    Withdraw from bank = $500

    Deposit amount will reduce = $7,500

    Required Reserve ratio = 10%

    Reserve = $7500 * 0.1

    = $750

    Loaned amount by the bank = $7,500 - $750

    = $6,750

    Money supply = money multiplier * monetary base

    = 10 * $6,750

    = $67,500

    After withdrawal the money supply = $67,500

    Decline is the money supply

    = $72,000 - $67,500

    = $4,500

    So, the money supply decreases = $4,500
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