Suppose the reserve ratio is 20 percent and the public holds $10 million in cash.Then the public decides to withdraw $5 million from the banks.How does the money supply eventually change?
A)The money supply falls by $5 million.
B)The money supply falls by $10 million.
C)The money supply falls by $25 million.
D)The money supply falls by $35 million.

Question

Quizplus · Accepted Answer

The withdrawal of $5 million reduces the reserves by $5 million. With a reserve ratio of 20%, the money multiplier is 5 (1/0.2). The decrease in reserves leads to a decrease in the money supply by $5 million * 5 = $25 million.

Suppose the Reserve Ratio Is 20 Percent and the Public