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Charlotte withdraws $8000 from her chequable 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)Refer to Scenario: Money Supply Changes II.By how much will the money supply contract as a result of the withdrawal?

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The money supply contracts by the initial withdrawal amount multiplied by the money multiplier. The money multiplier is 1 divided by the reserve requirement (1/0.20 = 5). Therefore, the contraction is $8000 * 5 = $40000. However, since $8000 is already withdrawn, the net contraction is $40000 - $8000 = $32000.

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