Question

If a bank depositor withdraws $1000 of currency from an account, what happens to bank reserves, checkable deposits, and the monetary base? Assume that the required reserve ratio on checkable deposits is 10% and banks do not hold any excess reserves.
a) reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged
b) reserves do not change, checkable deposits fall by $10,000, and the monetary base falls by $1,000
c) reserves do not change, checkable deposits fall by $1000 and the monetary base falls by $10,000
d) reserves fall by $10,000, checkable deposits fall by $1000 and the monetary base remains unchanged

Answer 1

Answer:

a) reserves fall by $1,000, checkable deposits fall by $10,000, and the monetary base remains unchanged

Explanation:

The bank reserves will decrease by the same amount that the client withdrew from the bank, in this case $1,000.

Since the required reserve ratio for checkable deposits is 10%, then the checkable deposits will decrease by 10 times the amount withdrawn from the bank ($1,000 x 10 = $10,000).

The monetary base remains unchanged since the money is still out there in the economy, it only changed from being in the bank to being in the client's pocket.