1. If the required reserve ratio is 20% and $10,000 of new money is printed, and

Question

1. If the required reserve ratio is 20% and $10,000 of new money is printed, and deposited into the system, by the federal reserve. What is the minimum change to the money supply is?

2. If the economy is experiencing a recession that would be considered, a negative, GDP gap.

True or false?

3, Suppose that Frank deposits $500 in bank A, and 2 hours later, Jane borrows $1000 from the same bank. We can conclude that the money supply changed by?

E. $1000

4. If a banks demand deposits (checking accounts) are $100,000 at a time when the required reserve ratio is 20% the bank's actual reserves is,

Explanation / Answer

1. Change in money supply = Change in reserves x Multiplier

Multiplier = 1/Reserve requirement = 1/0.20 = 5

Change in reserves = 20% of 10,000 = $ 2000

Change in MS = 5 x 2000 = $ 10,000

2. True

Under recession, actual GDP is less than the potential GDP which is known as recessionary gap.

4. Actual reserves = Deposits x RR = 100,000 x 20% = $ 20,000

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