Q.8. Tracy Williams deposits $500 that was in her sock drawer into a checking ac
ID: 1114681 • Letter: Q
Question
Q.8. Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank. a. How does the deposit initially change the T-account of the local bank? How does it change the money supply? b- If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit? c. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy's initial cash deposit of $500? c. d. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan and the bank maintains a reserve ratio of 5%, by how much could the money supply expand in response to Tracy's initial cash deposit of $500? d.Explanation / Answer
8.
A.
With deposit of the $500, the liability side will increase by the $500 and reserve in the asset side will also increase by $500 in the T-Account. The deposit of $500 will increase the money supply more money will be issued as loans to other people in the economy.
B.
If reserve ratio is 10%,
Then,
Required reserve = 10%*500 = $50 (it will be kept with the bank as required reserve)
New loans creation = 500 – 50 = $450
Hence, new loans of $450 can be issued.
C.
Total increase in money supply = Initial deposit / Required reserve ratio
Total increase in money supply = 500/10%
Total increase in money supply = $5000
D.
If reserve ratio is 5%
Total expansion in money supply = 500/5%
Total expansion in money supply = $10000
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