3 uecreases D demand for dollars increases. Use the following to answer question

Question

3 uecreases D demand for dollars increases. Use the following to answer question 9: Scenario: Money Supply Changes Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester Assume that the reserve requirement is 20% and that banks do not hold excess reserves. 9. (Scenario: Money Supply Changes II) According to the scenario Money Supply Changes II, as a result of the withdrawal, required reserves: A) decrease by $1,600. B) decrease by $6,400. C) decrease by $8,000. D) don't change. Page 3

Explanation / Answer

ANSWER:

AMOUNT WITHDRAWN BY CHARLOETTE = $8,000

RESERVE REQUIREMENT = 20%

IF THERE IS A WITHDRAWAL THE REQUIRED RESERVE WOULD DECREASE AS THE BANKS DO NOT HOLD EXCESS RESERVES.

DECREASE IN RESERVE = RESERVE REQUIREMENT * AMOUNT WITHDRAWN BY CHARLOETTE

DECREASE IN RESERVE = 20% * $8,000 = $1,600

HENCE THE CORRECT OPTION IS A.

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