Suppose the required ratio of reserves to deposits is 1:9,banks have no excess reserves,one person withdraws $10,000 from a checking account and stuffs it under a mattress,and no other person withdraws cash from the banking system.When the process has worked itself out,the money supply will show an additional decline of
A) $1,111.
B) $8,889.
C) $11,111.
D) $80,000.
E) $90,000.

Question

Quizplus · Accepted Answer

The initial withdrawal of $10,000 reduces the reserves by $10,000. With a reserve ratio of 1:9, this leads to a reduction in the money supply by $10,000 * 9 = $90,000.

Suppose the Required Ratio of Reserves to Deposits Is 1:9,banks