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

question 86

Multiple Choice

Suppose the banking system has $10 million in reserves, the reserve requirement is 20 percent, and there are no excess reserves. The public holds $10 million in cash. Then bankers decide that it is prudent to hold some excess reserves, and so begin to hold 25 percent of deposits in the form of reserves. At the same time, the public decides to withdraw $5 million in currency from the banking system. Other things the same, what will these actions cause the money supply to do?

• A)to change forms, but not size
• B)to fall by $10 million
• C)to fall by $25 million
• D)to fall by $35 million

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Definitions:

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