Suppose the required reserve ratio is 5 percent. If I make a $1000 deposit into the...

Suppose the required reserve ratio is 5 percent. If I make a $1000 deposit into the bank, economic activity will increase by

	$5,500 of new money.
	$5,000 of new money.
	$4,000 of new money.
	None of the above is correct.

2. Suppose the required reserve ratio is 12.5%. If you make a $500 deposit into the bank, how much can that bank immediately loan out?

	$500
	$437.50
	$62.50.
	8

3.

If banks were required to keep 100% of deposits as cash reserves (that is, the rrr is 100%), which of the following would correctly complete this sentence? The banking multiple is

	0 and banks create money.
	0 and banks do not create money.
	1 and banks create money
	1 and banks do not create money.

Expert Solution

Change in Money supply = Money Multiplier × Change in Monetary Base

Money Multiplier = 1/Required Reserve Ratio

Money Multiplier = 1/0.05

Money Multiplier = 20

Now the monetary base includes currency held by the public and total deposits. Since, the deposit has been made out of the cash held by the public so there will be no change in the economic activity. So, the correct option is “None of the above is correct”.

Rahul Sunny answered 2 years ago

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