Table 29-6

-Refer to Table 29-6.Suppose that all other banks are meeting their reserve requirements and that people hold only deposits and no currency.Assume that Peoples' Bank has a rule to hold no excess reserves and a rule to not relend loan repayments until the 10% reserve requirements is met.When it has met the reserve requirement,reserves have changed so that the money supply should have
A)increased by over $10 million
B)increased by less than $10 million
C)decreased by less than $10 million
D)decreased by more than $10 million

Question

Table 29-6
 
-Refer to Table 29-6.Suppose that all other banks are meeting their reserve requirements and that people hold only deposits and no currency.Assume that Peoples' Bank has a rule to hold no excess reserves and a rule to not relend loan repayments until the 10% reserve requirements is met.When it has met the reserve requirement,reserves have changed so that the money supply should have
A)increased by over $10 million 
B)increased by less than $10 million 
C)decreased by less than $10 million 
D)decreased by more than $10 million

Quizplus · Accepted Answer

The required reserves for Peoples' Bank are $200 million x 0.10 = $20 million. According to the table, Peoples' Bank has reserves of $5 million, which is $15 million short of the required amount. If Peoples' Bank receives deposits of $50 million and lends out $45 million (keeping no excess reserves), it will have $10 million in reserves, which is exactly the required amount. However, when it relends the $5 million loan repayment, it will fall below the required reserve level again. Therefore, it will have to call in $1 million in deposits (to get reserves back up to $20 million) and, as a result, the money supply will have to decrease by more than $10 million.

Table 29-6 -Refer to Table 29-6.Suppose That All Other Banks Are Meeting