Question

1. In a fractional reserve banking system, banks -------------

a. have the ability to influence the size of the money supply

b. don;t have the ability to influence the size of the money supply

c. can create both money and wealth in the economy

d. are obligated by the fed to keep all deposits as reserves

2. If you deposit $200 in the bank. If the reserve requirement ratio is 10%, what is the minimum amount of increase in the money supply in the economy?

a. $2000

b. $50

c. $10

d. $zero

3. Increasing the reserve requirement ratio---------------

a. reduces federal funds, which eventually increase the size of the money supply in the economey

b. reduces federal funds, which eventually reduces the size of the money supply in the economy

c. has no impact on the money supply

d. none of the above

PLEASE EXPLAIN QUESTION 2 HOW TO SOLVE

Answer 1

1. Ans: a) have the ability to influence the size of the money supply

Explanation:

In a fractional reserve banking system, bank keeps certain percentage of its customers deposits as reserves and lend out remaining money. Higher reserve ratio decreases the lending capacity of commercial banks whereas lower reserve ratio increases the lending capacity of commercial banks . So in a fractional reserve banking system, banks have the ability to influence the size of the money supply.

2. Ans : a) $2,000

Explanation:

Deposit multiplier = ( 1 / r ) * D

= ( 1/ 0.10 ) * $200

= 10 * $200

=$2,000

3. Ans:d) none of the above

Explanation:

Higher reserve ratio decreases the lending capacity of commercial banks whereas lower reserve ratio increases the lending capacity of commercial banks. Increase in  reserve requirement ratio increases federal funds. So that the commercial banks lend out less money. As a result it reduces the size of the money supply in the economy.;