1. What will happen to the money supply if Jamie withdraws $400 from her checkin

Question

1. What will happen to the money supply if Jamie withdraws $400 from her checking account and the required reserve ratio is 5% (3-5 sentences)

2. A bank run can result in bank failure because banks keep only a small fraction of their depositors' funds in the bank vault and are therefore unable to meet their customers' demands for their money. T/F

3.The banking crises in Finland, Sweden, and Japan in the early 1990s were caused by numerous bank runs in each country. T/F

4. Banking crises are usually followed by periods of economic expansion. T/F

Explanation / Answer

1. Withdrawing $400 from checking account will decrease bank's reserve by $400.

Here, money multiplier = 1/required reserve ratio = 1/5? = 20.

Money Multiplier = (Change in money supply / change in reserves).

Decrease in reserves by $400 will decrease the money supply by $(400 * 20) = $8000.

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