Carefully review the material in The Determinants of Investment, Chapter 28 of Tarshis. Briefly address the following questions:
1 answer:
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Answer:
The money supply decreases by $4,500.
Explanation:
The amount of deposits is $8,000.
The required reserve ratio is 10%.
The amount of required reserve
= 10% of $8,000
=
= $800
The amount to be loaned out
= Total deposit - Required reserves
= $8,000 - $800
= $7,200
The money supply is equal to money multiplier times the monetary base.
Money supply
=
=
= $72,000
So, the money supply before withdrawal is $72,000.
After withdrawal of $500, the deposits is
= $8,000 - $500
= $7,500
The amount of required reserve
= 10% of $7,500
=
= $750
The amount to be loaned out
= Total deposit - Required reserves
= $7,500 - $750
= $6,750
Money supply
=
=
= $67,500
So, the money supply after withdrawal is $67,500.
The decrease in money supply
= $75,000 - $67,500
= $4,500