Suppose George withdraws $60,000 from his bank. If the reserve ratio is 25 percent, then this transaction will lead to a decrease of ________ in checking account balances.
A) $15,000
B) $45,000
C) $90,000
D) $180,000

Question

Quizplus · Accepted Answer

When George withdraws $60,000, the bank loses that amount in reserves. With a 25% reserve ratio, banks can lend out 75% of deposits. However, the multiplier effect in reverse means that the banking system will eventually reduce the money supply by a factor of 1 divided by the reserve ratio (1/0.25 = 4). Thus, $60,000 x 4 = $240,000 decrease in checking account balances. The correct answer, considering the options provided and the typical understanding of the money multiplier effect, seems to be a mistake in the question's formulation or options. The correct calculation based on the given options should lead to a different understanding or clarification, as the intended answer appears to be D) $180,000, assuming a misunderstanding in the multiplier effect calculation.

Suppose George Withdraws $60,000 from His Bank