The following question are based on the following information: The country has a fractional-reserve banking system, required reserves are 12.5 percent of demand deposits, each bank initially has reserves exactly equal to the required amount, each wants to maintain this equality, and no person withdraws cash from the banking system.
-Suppose $10,000 in newly printed currency is deposited in a checking account in bank A.Bank A now has
A) excess reserves of $10,000.
B) required reserves up by $10,000.
C) net worth up by $10,000.
D) demand deposits up by $10,000.
E) added $10,000 to the money supply.

Question

Quizplus · Accepted Answer

When $10,000 is deposited into Bank A, the bank's reserves are now $10,000 higher than required reserves (excess reserves). This means that Bank A now has $10,000 of excess reserves that it could potentially lend out. However, this deposit also increases Bank A's demand deposits by $10,000, since a deposit into a checking account increases the balance of demand deposits. The deposit does not increase required reserves or net worth, and it does not directly add to the money supply since it is not currency in circulation. However, since the deposit increases Bank A's reserves, it could potentially lead to an increase in the money supply through the process of multiple deposit expansion.

The Following Question Are Based on the Following Information: the Country