Answer:
(i) Increases; $1,000 million
(ii) Decreases; $600 million
Explanation:
Initial required reserve ratio = 10%
(i) If the required reserve ratio falls to 5%.
At 10% required reserve ratio,
Money supply = Reserves ÷ required reserve ratio
= $100 million ÷ 0.10
= $1,000 million
At 5% required reserve ratio,
Money supply = Reserves ÷ required reserve ratio
= $100 million ÷ 0.05
= $2,000 million
Money supply increases by $1,000 million.
(ii) If the required reserve ratio rises to 25%.
At 10% required reserve ratio,
Money supply = Reserves ÷ required reserve ratio
= $100 million ÷ 0.10
= $1,000 million
At 25% required reserve ratio,
Money supply = Reserves ÷ required reserve ratio
= $100 million ÷ 0.25
= $400 million
Therefore, Money supply decreases by $600 million.