1. Suppose the required reserve ratio is 20%. grandma takes $100 cash she has bu

Question

1. Suppose the required reserve ratio is 20%. grandma takes $100 cash she has buried under the tree in the backyard and put it in a checking account at her bank. the banks loan out the maximum each time and each borrower takes every loan in the form of checking account, how much will the money supply increase?

2. Everything is the same as in question #1 above, except that the first borrower takes the loand in the form of cash which they wall out of the door with. How much will the money supply increase?

3. Everything is the same as in question #1 above, except this time granma has a bad dream about bank failures and removes $50 from her cheking account to bury as cash under the tree in the backyard. What happens to the money supply as a result?

Explanation / Answer

1) required reserve ratio = 20% Amount deposit=$ 100

multiplier = 1/ 20% =5 total money supply = 5*100= 500

2) NO money supply as rotation of money stopped when amount withdrawn in cash instead of checkable deposit.

3) checkable amount= $ 50 multiplier = 1/20%=5  

money supply = 50*5 =250

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