5. The monetary multiplier Suppose that Antonio makes a new cash deposit of $65,

Question

5. The monetary multiplier Suppose that Antonio makes a new cash deposit of $65,000. If the assumptions of the multiplier-deposit expansion process hold. (with the required reserve ratio set at 10%), this deposit will the money supply by (Note: Currency held by the public is counted in the money supply as part of M1.) . Which of the following assumptions is necessary for the money multiplier( checkable-deposit creation and E is the initial change in excess reserves)? to be used in the equation D E (where D stands for the maximum People's marginal propensity to consume does not rise with income O Borrowers use the entire loan amount to pay others, who will deposit all of the funds in a checking account. Borrower default rates are stable. If O If borrower default rates were not stable, then the money creation process would be disrupted. O If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system If people kept some of the new money as cash rather than depositing it in another checking account, this cash could not, in turn, become a bank loan.

Explanation / Answer

If the assumptions of the multiple deposits expansion process hold ,this deposits will INCREASE the money supply by $650000. ( because money supply = deposits * money multiplier and that is = 65000*10=650000)

B) The answer is A and B. And C

C) if the above assumption dis not hold, the changes in the money supply would be LESS thanyou find because,

The answer is All parts. That is A,B and C.

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