Question

rr = 0.10 cr = 0.02.

Jim, who is a resident of Moneyland, just withdrew $5,100 from his savings account. Given the currency-deposit ratio (cr) held by residents of Moneyland, after this transaction we can expect

	Jim's demand deposits to increase by $2,550 and the currency that he holds to increase by $2,550.
	Jim's demand deposits to increase by $5,000 and the currency that he holds to increase by $100.
	Jim's demand deposits to increase by $5,100 and the currency that he holds to remain unchanged.
	Jim's demand deposits to increase by $4,500 and the currency that he holds to increase by $600

Assume that because of increased uncertainty about the economy the residents of Moneyland decide to increase their currency-deposit ratio (cr) to 0.36. Nothing changes in the preferences of private banks, so the reserve-deposit ratio remains rr = 0.10.

After the increase in the currency-deposit ratio (cr), the money multiplier becomes:

As a consequence of the increase in the currency-deposit ratio (cr), the money supply M in Moneyland will

	increase.
	decrease.
	remain unchaged.

Answer 1

Q-1 :: ANSWER :: (B)Jim's demand deposits to increase by $5,000 and the currency that he holds to increase by $100.

=> Explanation :

Cr = Currency / Deposits

So As Jim Withdraw $5,100 From Saving account and its Currency Deposit Ratio Is 0.02 (2%) So We Assume That The Currency + Deposit =100 + 2 = 102, So C = Currency, D = Deposit

102 C + D = 5,100 C +D

100 D = ? D

So Deposit = 100*5100 / 102 = $5,000

So Currency = $5,000 * 0.02 = $100

So Because Of That Transaction From Saving Account It Increase The Total Demand Deposit $5000 And As Per Cr The Currency Increase $100.

Q-2 :: ANSWER :: Money Multiplier : Increase(10), Money Supply : Decrease

=> Explanation ::

As We Show That Currency Deposit Ratio Increase From 0.02 To 0.36 So It Means People Hold More Currency Because Of The Uncertainty In The Moneyland. So Wheb Currency Deposit ratio Increase It Decrease The money Multiplier Which Means Require Reserve By Banks Increase In This Situation. So As money Multiplier Decrease Because Of The Currency Deposit Ratio So It Leads to Decrease In The Money supply In The Economy Of Moneyland Because Banks Have To Hold More Deposits As Reserve So Their Lending Capacity Decrease.

money Multiplier = 1/Reserve Ratio

= 1/0.10

= 10