Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 29: Problem 9

What will happen to the money supply under the following circumstances in a checkable-deposits-only system? a. The required reserve ratio is \(25 \%,\) and a depositor withdraws \(\$ 700\) from his checkable bank deposit. b. The required reserve ratio is \(5 \%,\) and a depositor withdraws \(\$ 700\) from his checkable bank deposit. c. The required reserve ratio is \(20 \%,\) and a customer deposits \(\$ 750\) to her checkable bank deposit. d. The required reserve ratio is \(10 \%,\) and a customer deposits \(\$ 600\) to her checkable bank deposit.

Short Answer

Expert verified
a. Withdrawing $700 with a 25% reserve ratio. b. Withdrawing $700 with a 5% reserve ratio. c. Depositing $750 with a 20% reserve ratio. d. Depositing $600 with a 10% reserve ratio. Answer: a. The money supply will decrease by $2,800. b. The money supply will decrease by $14,000. c. The money supply will increase by $3,750. d. The money supply will increase by $6,000.

Step by step solution

01

1. Calculate the initial money supply

To calculate the initial money supply, we need to know the total amount of checkable deposits and the reserve ratio. The total money supply can be found using the money multiplier formula: $ M_0 = \frac{1}{Required \ Reserve \ Ratio} $
02

a. Withdrawing \(\$700\) with a \(25\%\) reserve ratio

First, calculate the initial money supply using the formula: $ M_0 = \frac{1}{0.25} = 4 $ Now, calculate the change in money supply after the withdrawal: $ ΔM = -\$700 \times 4 = -\$2800 $ Therefore, the money supply will decrease by \(\$2800\).
03

b. Withdrawing \(\$700\) with a \(5\%\) reserve ratio

First, calculate the initial money supply using the formula: $ M_0 = \frac{1}{0.05} = 20 $ Now, calculate the change in money supply after the withdrawal: $ ΔM = -\$700 \times 20 = -\$14{,}000 $ Therefore, the money supply will decrease by \(\$14{,}000\).
04

c. Depositing \(\$750\) with a \(20\%\) reserve ratio

First, calculate the initial money supply using the formula: $ M_0 = \frac{1}{0.2} = 5 $ Now, calculate the change in money supply after the deposit: $ ΔM = \$750 \times 5 = \$3750 $ Therefore, the money supply will increase by \(\$3750\).
05

d. Depositing \(\$600\) with a \(10\%\) reserve ratio

First, calculate the initial money supply using the formula: $ M_0 = \frac{1}{0.1} = 10 $ Now, calculate the change in money supply after the deposit: $ ΔM = \$600 \times 10 = \$6{,}000 $ Therefore, the money supply will increase by \(\$6{,}000\).

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

The Congressional Research Service estimates that at least \(\$ 45\) million of counterfeit U.S. \(\$ 100\) notes produced by the North Korean government are in circulation. a. Why do U.S. taxpayers lose because of North Korea's counterfeiting? b. As of December 2014 , the interest rate earned on one-year U.S. Treasury bills was \(0.13 \%\). At a \(0.13 \%\) rate of interest, what is the amount of money U.S. taxpayers are losing per year because of these \(\$ 45\) million in counterfeit notes?

In Westlandia, the public holds \(50 \%\) of \(\mathrm{M} 1\) in the form of currency, and the required reserve ratio is \(20 \%\). Estimate how much the money supply will increase in response to a new cash deposit of \(\$ 500\) by completing the accompanying table. (Hint: The first row shows that the bank must hold \(\$ 100\) in minimum reserves \(-20 \%\) of the \(\$ 500\) deposit- against this deposit, leaving \(\$ 400\) in excess reserves that can be loaned out. However, since the public wants to hold \(50 \%\) of the loan in currency, only \(\$ 400 \times 0.5=\$ 200\) of the loan will be deposited in round 2 from the loan granted in round 1.) How does your answer compare to an economy in which the total amount of the loan is deposited in the banking system and the public doesn't hold any of the loan in currency? What does this imply about the relationship between the public's desire for holding currency and the money multiplier?

Show the changes to the T-accounts for the Federal Reserve and for commercial banks when the Federal Reserve sells \(\$ 30\) million in U.S. Treasury bills. If the public holds a fixed amount of currency (so that all new loans create an equal amount of checkable bank deposits in the banking system) and the minimum reserve ratio is \(5 \%\), by how much will checkable bank deposits in the commercial banks change? By how much will the money supply change? Show the final changes to the T-account for the commercial banks when the money supply changes by this amount.

Although the U.S. Federal Reserve doesn't use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have \(\$ 100\) million in reserves and \(\$ 1,000\) million in checkable deposits; the initial required reserve ratio is \(10 \%\). The commercial banks follow a policy of holding no excess reserves. The public holds no currency, only checkable deposits in the banking system. a. How will the money supply change if the required reserve ratio falls to $5 \%$ ? b. How will the money supply change if the required reserve ratio rises to $25 \%$ ?

There are three types of money: commodity money, commodity-backed money, and fiat money. Which type of money is used in each of the following situations? a. Bottles of rum were used to pay for goods in colonial Australia. b. Salt was used in many European countries as a medium of exchange. c. For a brief time, Germany used paper money (the "Rye Mark") that could be redeemed for a certain amount of rye, a type of grain. d. The town of Ithaca, New York, prints its own currency, the Ithaca HOURS, which can be used to purchase local goods and services.
See all solutions

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free