Suppose you withdraw $1,000 from your checking account. If the reserve requirement is 20 percent, how does this transaction affect the supply of money and the excess reserves of your bank?
A) There is no change in the supply of money; your bank's excess reserves are reduced by $800.
B) There is no change in the supply of money; your bank's excess reserves are reduced by $200.
C) The money supply increases by $1,000, and the excess reserves of your bank are reduced by $800.
D) The money supply increases by $1,000, and the excess reserves of your bank are reduced by $200.

Question

Quizplus · Accepted Answer

When you withdraw $1,000, the money supply does not change because the money is simply transferred from the bank to you. The bank's excess reserves decrease by $800 because it must keep 20% ($200) as required reserves, leaving $800 as the reduction in excess reserves.

Suppose You Withdraw $1,000 from Your Checking Account