Explanation Formula to calculate multiplier (M): M = 1 Required Reserve ….(I) a. The required reserve ratio is 25%, and a depositor withdraws $700 from checkable bank deposit. Given, Required reserve ratio is 25%. Depositor withdraws are $700 from his checkable bank deposit. The increase in money supply in the economy is the multiplier times the money supply. Substitute 0.25 for required reserve in equation (I). M = 1 0.25 = 4 The reserve held with the bank will be $175 ( 25 % of $ 700 ) and the rest of the amount will be given as loans that are $525 ( $ 700 − $ 175 ) . The loan given to people will decrease multipliers times the money supply. Therefore money supply will decrease by $2,100 ( $ 525 × 4 ) . b. The required reserve ratio is 5%, and a depositor withdraws $700 from checkable bank deposit. Given, Required reserve ratio is 5%. Depositor withdraws are $700 from his checkable bank deposit. The increase in money supply in the economy is the multiplier times the money supply. Substitute 0.05 for required reserve in equation (I). M = 1 0.05 = 20 The reserve held with the bank will be $35 ( 5 % of 700 ) and the rest of the amount will be given as loans that are $665 ( $ 700 − $ 35 ) . The loan given to people will decrease multipliers times the money supply, therefore money supply will decrease by $13,300 ( $ 665 × 20 )

Money Supply: It refers to that amount of money which is in circulation within the economy at a particular point of time. It includes cash currency and all the liquid assets which can be converted into cash on demand. Effect of each situation on money supply.

EBK MACROECONOMICS

5th Edition

ISBN: 8220106773925

Author: KRUGMAN

Publisher: MAC HIGHER

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Chapter 14, Problem 9P

To determine

Concept Introduction:

Money Supply:

It refers to that amount of money which is in circulation within the economy at a particular point of time. It includes cash currency and all the liquid assets which can be converted into cash on demand.

Effect of each situation on money supply.

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