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The country of Econia has a fractional-reserve banking system—i.e. banks are required to hold a certain percentage of their deposits as “required reserves” that cannot be used for loans. All citizens of Econia deposit all of their money in banks and all banks loan out all of their excess reserves. a. Suppose that the required reserve ratio is 10%. By how much (if at all) will the money supply of Econia change if a citizen withdraws $500 from her bank account and holds it in cash (i.e. does not deposit it in another bank)? (Note: be sure to specify whether the change in money supply is an increase or decrease.) b. Suppose that the required reserve ratio is 20%. By how much (if at all) will the money supply of Econia change if a citizen deposits $600 in his bank account? Assume that the $600 had not previously been deposited in a bank. (Note: be sure to specify whether the change in money supply is an increase or decrease.) c. What two factors mentioned in the description of the Econian economy above guarantee that the money multiplier will be at its maximum possible value?

The country of Econia has a fractional-reserve banking system—i.e. banks are required to hold a certain percentage of their deposits as “required reserves” that cannot be used for loans. All citizens of Econia deposit all of their money in banks and all banks loan out all of their excess reserves. a. Suppose that the required reserve ratio is 10%. By how much (if at all) will the money supply of Econia change if a citizen withdraws $500 from her bank account and holds it in cash (i.e. does not deposit it in another bank)? (Note: be sure to specify whether the change in money supply is an increase or decrease.) b. Suppose that the required reserve ratio is 20%. By how much (if at all) will the money supply of Econia change if a citizen deposits $600 in his bank account? Assume that the $600 had not previously been deposited in a bank. (Note: be sure to specify whether the change in money supply is an increase or decrease.) c. What two factors mentioned in the description of the Econian economy above guarantee that the money multiplier will be at its maximum possible value?

ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
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The country of Econia has a fractional-reserve banking system—i.e. banks are required to hold a certain percentage of their deposits as “required reserves” that cannot be used for loans. All citizens of Econia deposit all of their money in banks and all banks loan out all of their excess reserves. a. Suppose that the required reserve ratio is 10%. By how much (if at all) will the money supply of Econia change if a citizen withdraws $500 from her bank account and holds it in cash (i.e. does not deposit it in another bank)? (Note: be sure to specify whether the change in money supply is an increase or decrease.) b. Suppose that the required reserve ratio is 20%. By how much (if at all) will the money supply of Econia change if a citizen deposits $600 in his bank account? Assume that the $600 had not previously been deposited in a bank. (Note: be sure to specify whether the change in money supply is an increase or decrease.) c. What two factors mentioned in the description of the Econian economy above guarantee that the money multiplier will be at its maximum possible value?
Transcribed Image Text:The country of Econia has a fractional-reserve banking system—i.e. banks are required to hold a certain percentage of their deposits as “required reserves” that cannot be used for loans. All citizens of Econia deposit all of their money in banks and all banks loan out all of their excess reserves. a. Suppose that the required reserve ratio is 10%. By how much (if at all) will the money supply of Econia change if a citizen withdraws $500 from her bank account and holds it in cash (i.e. does not deposit it in another bank)? (Note: be sure to specify whether the change in money supply is an increase or decrease.) b. Suppose that the required reserve ratio is 20%. By how much (if at all) will the money supply of Econia change if a citizen deposits $600 in his bank account? Assume that the $600 had not previously been deposited in a bank. (Note: be sure to specify whether the change in money supply is an increase or decrease.) c. What two factors mentioned in the description of the Econian economy above guarantee that the money multiplier will be at its maximum possible value?
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