Question

1. How is the monetary base affected when currency is deposited in a bank? ___________________

2. How are bank reserves affected when currency is deposited in a bank? _______________

3. When banks hold more reserves than they are required to hold, the surplus is known as? ______ _______

4. How does a decrease in reserve requirements affect the money multiplier? _________

Answer 1

1) Remains the same.

"Monetary base is the total amount of currency that is deposited in the banks and the total currency in circulation." Since monetary base includes the deposits in the banks, even if the currency shifts from general circulation to bank deposits, the total Monetary base remains the same.

2) Bank reserves increase.

If currency is deposited in a bank, there is an increase in the bank reserves due to additional currency being deposited.

3) Excess reserves.

" Excess reserves are capital reserves that are held by a bank in excess of what is the minimum reserve requirement amount."

4) Money multiplier will be higher.

"A decrease in reserve requirements allows the banks to lend more money and thus the money multiplier will be higher, and this will also result in an increase in money supply."