Question

Suppose that in a given month $39 million is deposited into the banking system while $51 million is withdrawn. Assume that the reserve requirement is 25 percent and that the banking system had no excess reserves at the beginning of the month. What is the maximum change that can be expected in the money supply as a consequence of these deposits and withdrawals? Instructions: Enter a positive number to show an increase and a negative number to show a decrease $ million

Answer 1

Answer-.... $ —48 million

Explanation:- Deposit of the given month =% 39 million, withdrawals of the month =$ 51 million,

Change in the reserves ( 39 —51 ) = $ —12 million

Now, Money multiplier ( change in the money supply/change in the reserves)= 1/reserve requirements or, ( change in the money supply/—12 )= 1/0.25 ( reserve requirements =25%=0.25 )

or, Change in the money supply/—12 = 4 (1/0.25=4)

or, Change in the money supply = —12×4 = —48 million