Question

The following information pertains to the Bank of the Kawartas o Bank of the Kawarthas Assets: Liabilities: Reserves $3.500 Deposits $70,000 Loans $66,500 Refer to Table 10-4 Assume that all other banks hold only the required 4 percent of deposits as reserves, and that people hold only deposits and no currency. If the Bank of the Kawarthas decides to hold reserves of 4 percent, by how much would the economy's money supply increase? O $42.000 O b. 530,000 O c$45,000 O d. $35,000

Answer 1

1. Money supply = multiplier * deposits

Earlier reserves = 3500

Reserve ratio = 3500/70000 * 100

= 5%

Multiplier = 1/0.05

= 20

Money supply = 20*70000

= 14,00,000

At present, reserve ratio = 4%

Multiplier = 1/required reserve ratio

= 1/0.04

= 25

Money supply = 25*70000

= 1750000

Change in money supply = 1750000 - 1400000

= 350000

2. GDP = Consumption expenditure + investment expenditure+ government expenditure + ( export - import)

= 6000+4000+3500+(1500-1600)

= 13500 - 100

= $13400

Tax is a transfer payment. It is not included in GDP calculation.