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9. Suppose a country has a 100% reserve requirement for all banks. a. How much does the money supply change from a deposit of

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9. (a) If a country has 100% reserve requirement for all banks then a deposit of $100 by a household will not lead to any change in money supply because the whole amount will be saved as reserves and banks will not lend any amount if they face the situation of immediate withdrawal by all the depositors. So, money supply will not change.

(b) Bank acts as an intermediary between depositors and borrowers. It also creates money by lending a proportion of the amount it receives in deposits and rest is saved depending on the reserve requirement.

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