Question

1. Assuming that a citizen takes $ 100 that he had under his bed and deposits it in his bank account. If these $ 100 remain in the banking system as reserves and if the banks have reserves equal to 10% of their deposits?

to. How much does the total amount of deposits in the banking system increase?
b. How much does the money supply increase?

Answer 1

(a)

Money multiplier (m) = 1/rr where rr = required reserve ratio = 10% = 0.10

=> m = 1/0.1= 10

Increase in total deposit = m*change in deposit

Here, she has deposited 100 which means that deposit made is increased by 100.

So, increase in total deposit = 10*100 = $1000(positive means that money supply increases)

(b)

M = C + D

change in M = change in C + change in D

change in M = change in money supply, change in C = change in currency and here currncy reduced by 100 and thus change in C = -100 abd change in D = change in total deposits = 1000(solved above)

Thus change in money supply = -100 + 1000 = 900

Hence, increase in money supply = $900