Answer:
money supply decreases by $4,500
Explanation:
Money multiplier (m) = 1 ÷ Reserve required ratio
= 1 ÷ 0.1
= 10
Initial amount of deposits = $12,000
Required reserves = 10% of $12,000
= $1,200
Therefore,
Amount that is loaned out by bank = $12,000 - $1,200
= $10,800 (Monetary base)
Hence, the money supply before the withdrawal is as follows:
= Money multiplier × Monetary base
= 10 × $10,800
= $108,000
When $500 cash withdraw from the bank account:
The amount of deposits reduce to $11,500
Required reserves = 10% of $11,500
= $1,150
Therefore,
Amount that is loaned out by bank = $11,500 - $1,150
= $10,350 (Monetary base)
Hence, the money supply before the withdrawal is as follows:
= Money multiplier × Monetary base
= 10 × $10,350
= $103,500
Reduction in the money supply:
= $108,000 - $103,500
= $4,500
Therefore, the money supply decreases by $4,500.
