19. Under fractional banking, when a bank lends to a customer n. the money suppl

Question

19. Under fractional banking, when a bank lends to a customer n. the money supply increases. b. bank profitability is decreased e. the bank is protected from a run d. bank credit decreases -20. If the Fed raises the primary credit lending rate, what happens to reserves and the money supply? a Reserves increase and the money supply decreases b. Both increase c. Reserves decrease and the money supply increases. d. Both decrease. 21. If the reserve requirement is 20 percent and a new deposit of $10,000 in cash is made by a customer to their checking account, by how much are excess reserves increased? a. $10,000 b. $8,000 c. $4,000 d. $2,000 How 22. The Ponderosa Bank receives a new deposit of $2.,500. The reserves requirement is 20 percent. much can this bank loan out as a result of this deposit? a. $25,000 b. $12,500 c. $3,125 d. $2,000 e. $500 -23. In Figure 1 , which panel shows the effect of inflation on the interest rate? a. Panel (A) b. Panel (B) c. Panel (C) d. Panel (D) Cs) Quantity of Keserves Quntity of Reserves

Explanation / Answer

19. a)Money sly increases

Fractional reserve banking allows banks to create credit in the form of deposit which helps in increasing money supply through the multiplier effect.

20 a)

Due to increase in lending rate the money available at the banks for lending decreases hence money supply decreases hence reserve also increases.

21. b) 8000

excess reserve =10000- 20% of 10000=8000

22.d)

bank loan amount = 2500-20%2500=2000

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