Suppose the Banking System Has $10 Million in Reserves and the Reserve

question 122

Multiple Choice

Suppose the banking system has $10 million in reserves and the reserve ratio is 20 percent.Then bankers decide to increase the reserve ratio to 25 percent.How does this decision eventually change the money supply?

• A)It falls by $20 million.
• B)It falls by $10 million.
• C)It falls by $5 million.
• D)It falls by $0.5 million.

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Definitions:

Interest Income

Earnings received from deposit accounts or investments through the payment of interest.

Eligible Dividends

Dividends that are designated by a corporation to be eligible for a lower tax rate for the receiver, depending on jurisdiction.

Average Tax Rate

The percentage of total income that goes to taxes, calculated by dividing the total amount of tax paid by the total income.

Taxable Income

The sum of earnings that determines the tax liability of a person or corporation to the state.