Author Question: Suppose that the required reserve ratio is 10 percent and you withdraw 25,000 from Comerica Bank. ... (Read 117 times)

MirandaLo · **on:** Jun 29, 2018

Suppose that the required reserve ratio is 10 percent and you withdraw 25,000 from Comerica Bank. What is the deposit multiplier? What is the total decrease in deposits in the banking system? What is the change in the money supply?

What will be an ideal response?

Question 2

Refer to Figure 23-3. Suppose that investment spending increases by 10 million, shifting up the aggregate expenditure line and GDP increases from GDP1 to GDP2. If the MPC is 0.9, then what is the change in GDP?

A) 9 million B) 10 million C) 90 million D) 100 million

bulacsom · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

The simple deposit multiplier is equal to (1/required reserve ratio). In this case it is 1/0.1 = 10. Since the deposit multiplier is 10, then a decrease in deposits in the banking system is equal to the multiplier times the initial withdrawal. The change in deposits will be negative as the withdrawal will shrink deposits in the banking system. This is 10 -25,000 = -250,000. To find the change in the money supply, we must then add back the initial withdrawal, as now cash held by the public increases by the size of the initial withdrawal. Thus the change in the money supply is -250,000 + 25,000 = -225,000.

Answer to Question 2

D