Homework Answers
Given that Reserves= 2000
cash= 5000
Reserves ratio= 10%.
A) Money multiplier = (1 / R)
= 1 / 0.1
= 10.
B) Given Deposits = 2000
Money supply = Money multiplier * Deposits
= 10 * 2000
= $20,000.
C) As deposits = 1000.
Money supply = Money multiplier * New Deposits.
= 10 * 1,000
= $10,000.
D) As increase in the bank deposits withdrawls reduces the bank's capacity to multiply the money in hand and thus the money supply will decrease. Hence, both are negatively related to each other.
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