If the reserve requirement is 10%, then a $6,000 decrease in deposits means that the money supply
A) will decrease by $600.
B) has the potential to decrease by $600.
C) will decrease by $60,000.
D) has the potential to decrease by $60,000.

Question

Quizplus · Accepted Answer

With a reserve requirement of 10%, a $6,000 decrease in deposits can lead to a potential decrease in the money supply of up to $60,000. This is because each dollar of reserves supports $10 of deposits through the money multiplier effect (1/reserve requirement), so a reduction in deposits can have a multiplied effect on the overall money supply.

If the Reserve Requirement Is 10%, Then a $6,000 Decrease