reserves for a bank a re $12,000, excess reserves are $2.000, and demand deposit
ID: 1122597 • Letter: R
Question
reserves for a bank a re $12,000, excess reserves are $2.000, and demand deposits are $100,000, the money multiplier must be A. 20. B. 15. C. 10. 6. Suppose a banki ng system has a required reserve ratio of 0.10. How much can the money supply increase in response to a $500 increase in excess reserves for the whole banking system? A. $50. B. $500. C. $5,000. D. $4,500. 7. Suppose a banking system has $120 million in deposits, a required reserve ratio of 20 percent, and total bank reserves for the whole system of $100 million. Then the potential increase in deposit creation for the whole system is equal to A. $120 million. B. $76 million. C. $O D. $380 million. 8. Ceteris paribus, the money supply becomes smaller when A. A loan is repaid to the banking system by a bank customer. B. An individual deposits currency into her transactions account. C. The Federal Reserve reduces the reserve requirement D. A bank uses its excess reserves to make a loan.Explanation / Answer
5. Required reserve = Total reserves - Excess reserves = 12000 - 2000 = 10000
Deposits = 100,000
Required reserve ratio = Required reserve / Deposits x 100 = 10000/100,000 x 100 = 10%
Multiplier = 1/Required reserve ratio = 1/0.10 = 10
Answer is C) 10
6. Multiplier = 1/RRR = 1/0.10 = 10
Money supply = Excess reserve x Multiplier = 500 x 10 = $ 5000
Answer is C) $ 5000
7. Excess reserve = Total reserve - Required reserve = 100 million - 20% of $ 120 million
= 100 million - 24 million = $ 76 million
Increase in deposit creation = Excess reserve x Multiplier = 76 million x 1/0.20 = 76 million x 5 = $ 380 million
Answer D) $ 380 million
8. A) A loan is repaid to the banking system by a bank customer.
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