Use the following to answer questions :
Scenario: Money Supply Changes
The reserve requirement is 10% and Jack withdraws $5,000 travel money from his checkable deposit. Assume that banks do not hold any excess reserves and that the public holds no currency, only checkable bank deposits.
-(Scenario: Money Supply Changes) Look at the scenario Money Supply Changes. By how much must the bank's loans decrease as a result of the withdrawal?

Question

Quizplus · Accepted Answer

When Jack withdraws $5,000 from his checkable deposit, his bank has to decrease its reserves by $500 (10% of the withdrawal amount). Since the bank had no excess reserves, this decrease of $500 in reserves also decreases the amount of loans the bank can give out by the same amount, which is $5,000 - $500 = $4,500. Therefore, the bank's loans must decrease by $4,500 as a result of the withdrawal.

Use the Following to Answer Questions