6. The monetary multiplier AaAa Suppose that Kristen finds $50,000 in cash in a

Question

6. The monetary multiplier AaAa Suppose that Kristen finds $50,000 in cash in a mattress that was given to her and decides to deposit all of the money into her chequing account at a bank. If the single bank had a desired reserve ratio of 20%, its excess reserves would expansion process holds and the banking system as a whole has a desired reserve ratio of 20%, the banking system will money supply) and it could loan out . If the assumption of the multiple-deposit the money supply by . (Hint: Currency held by the public is counted in the Which of the following assumptions is necessary for the money multiplier to calculate the change in demand deposits by the money supply expansion process? O Banks hold no excess reserves. O Banks have perfect information about the creditworthiness of all borrowerss O The Bank of Canada has set the reserve ratio at 20%. If the previous correct assumption did not hold, the change in the money supply would be previous correct answer because: than the O Banks would make fewer loans than they would if they could perfectly observe borrowers' true riskiness. O If banks held excess reserves, they would make fewer loans than they could. The multiplier holds only as long as the desired reserve ratio is less than 10%.

Explanation / Answer

With a desired ratio of 20%, it excess reserves would be $40,000 (50,000*0.8) and it can loan out $40,000. The banking system will increase the money supply by 250,000(50,000*(1/0.2))

Option 1 Banks hold no excess reserves, in the money supply would get affected it holds bank excess reserves

Option 2 If they could hold back more reserves then it would make fewer loans than they could

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