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 will the money supply contract as a result of the withdrawal?

Question

Quizplus · Accepted Answer

The reserve requirement is 10%, so for every $1 deposited, banks can lend out $0.90. Jack withdrew $5,000, so the banks will have to reduce their loans by 10 times that amount, or $50,000. Therefore, the money supply will contract by $50,000.

Use the Following to Answer Questions