The commercial banking system, because of a recent change in the required reserve ratio from 8 percent to 10 percent, ﬁnds that it is $50 million short of reserves. If it is unable to obtain any additional reserves, it must reduce
Deposits and money supply by
A) $250 million.
B) $625 million.
C) $500 million.
D) $50 million.

Question

Quizplus · Accepted Answer

Since the required reserve ratio has increased, the amount of reserves required by the commercial banking system also increases. The banking system is now $50 million short of this required reserve amount, which means that it must reduce its deposits and money supply by $500 million (10% of $500 million equals $50 million). Therefore, the correct answer is C.

The Commercial Banking System, Because of a Recent Change in the Required