Question

5.The simple deposit multiplier can be used to calculate the ultimate increase in checkable deposits when Bill deposits $10,000 into his account at the Western National Bank.

a.Assume that there are no cash leakages, banks lend out all their excess reserves, and the required reserve ratio is 10%.Calculate the ultimate increase in checking deposits when Bill deposits $10,000 into his account. Show your work.

b.Suppose Bill withdraws $10,000 from his checking account. Explain why there will be a multiple contraction in checkable deposits.

Answer 1

yes, simple deposit multiplier is given by 1/ required reserve,

it helps us know how is the ultimate increase in the money supply due to some chcekable deposits

the ultimate increase will be

10000/required reserve ratio

Deposits = 10000

RR = 10

Increase in money supply = 1/RR*Deposits = 1/0.1*10000 = $100,000

That is the money supply will go up by a maximum of $100,000.

b. Withdrawal of 10000 by Bill will have multiple effects on the money supply. If the money is kept in bank and there is no leakage, the deposits which he has withdrawn may have created money to the extent of $100,000. The process will look like this.

The process will go on until all deposits are exhausted and loaned out. WHatever being loaned out by 1st bank will be deposited in other bank and after keeping reserves will be loaned out and so on. The table shows only 1st 10 banks' transaction.

Initial Deposits			10000
Bank No.	Reserve	Loans	Total
1	1000.0	9000.0	10000.0
2	900.0	8100.0	9000.0
3	810.0	7290.0	8100.0
4	729.0	6561.0	7290.0
5	656.1	5904.9	6561.0
6	590.5	5314.4	5904.9
7	531.4	4783.0	5314.4
8	478.3	4304.7	4783.0
9	430.5	3874.2	4304.7
10	387.4	3486.8	3874.2