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Scenario: Money Supply Changes II
Charlotte withdraws $8,000 from her checkable bank deposit to pay tuition this semester. Assume that the reserve requirement is 20% and that banks do not hold excess reserves.
-(Scenario: Money Supply Changes II) Look at the scenario Money Supply Changes II. By how much will the money supply contract as a result of the withdrawal?

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The initial withdrawal of $8,000 reduces the bank's reserves by $8,000. With a reserve requirement of 20%, the money multiplier is 1/0.2 = 5. Therefore, the total contraction in the money supply is $8,000 * 5 = $40,000. However, since the initial $8,000 is still in circulation (just not in the bank), the net contraction is $40,000 - $8,000 = $32,000.

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