Table 29-4 The following information pertains to the Bank of Edmonton.

-Refer to Table 29-4. Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency. If the Bank of Edmonton decides to hold exactly 5 percent reserves, by how much would the economy's money supply increase?
A)$500
B)$1000
C)$1500
D)$2000

Question

Table 29-4 The following information pertains to the Bank of Edmonton.
 
-Refer to Table 29-4. Assume that all other banks hold only the required 5 percent of deposits as reserves and people hold only deposits and no currency. If the Bank of Edmonton decides to hold exactly 5 percent reserves, by how much would the economy's money supply increase?
A)$500 
B)$1000 
C)$1500 
D)$2000

Quizplus · Accepted Answer

If the Bank of Edmonton decides to hold exactly 5% reserves, it will need to decrease its loans by $10,000 and increase its reserves by $500 (5% of $10,000). The decrease in loans will result in a decrease in the money supply by $10,000, while the increase in reserves will result in an increase in the money supply by $500. Overall, the money supply will decrease by $9,500 ($10,000 - $500). Therefore, if all other banks hold only required reserves, the economy's money supply will decrease by $9,500. But since we are interested in the increase in the money supply, we need to take the absolute value, so the answer is $1000.

Table 29-4 the Following Information Pertains to the Bank of Edmonton