Suppose the required reserve ratio is 10% and a depositor withdraws $500 from her checkable deposit. The money supply will _____ if the banking system does NOT hold any excess reserves.

Question

Quizplus · Accepted Answer

If the depositor withdraws $500, then her checkable deposit decreases by this amount. However, since the required reserve ratio is 10%, the bank must hold $50 of reserves (10% of $500). If the banking system does not hold any excess reserves, it will need to reduce the money supply by $4500 ($500 - $50 = $450, $450 x 10 = $4500) in order to maintain the required reserve ratio. Therefore, the correct choice is (C).

Suppose the Required Reserve Ratio Is 10% and a Depositor