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Chapter 15: Q.4 (page 410)

If a bank depositor withdraws$1000 of currency from an account, what happens to reserves, checkable deposits, and the monetary base?

Short Answer

Expert verified

The monetary base will be unchanged.

Step by step solution

01

Concept Introduction

The monetary base (or M0) is the aggregate sum of cash that is either widely accepted in the possession of the general population or as business bank stores held in the national bank's stores.

02

Explanation

Total reserves and checking deposits will both reduce by $1,000 while money outside of banks will increment by $1,000. Since money outside of banks ascends by the very sum that concluded reserves decline, the financial base will be unaltered.

03

Final Answer

Total reserves and checking deposits will both decrease by $1000. The monetary base will be unchanged.

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Most popular questions from this chapter

If the Fed sells $2million of bonds to the First National Bank, what happens to reserves and the monetary base? Use T-accounts to explain your answer.

What effect might a financial panic have on the money multiplier and the money supply? Why?

If reserves in the banking system increase by 1billion because the Fed lends 11billion to financial institutions, and checkable deposits increase by 9billion, why isn’t the banking system in equilibrium? What will continue to happen in the banking system until equilibrium is reached? Show the T-account for the banking system in equilibrium.

During the Great Depression years from 1930 to 1933, both the currency ratio c and the excess reserves ratio e rose dramatically. What effect did these factors have on the money multiplier?

The money multiplier declined significantly during the period 1930-1933 and also during the recent financial crisis of 2008-2010. Yet the 2008-2010money supply decreased by 25% in the Depression period but increased by more than 20% during the recent financial crisis. What explains the difference in outcomes?
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