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:

Maturity

The date on which the principal or final payment is due on a loan or security.

Social Security Tax

A mandatory contribution imposed by governments to fund public programs that provide retirement benefits, disability income, and other social security services.

Medicare Tax

A federal tax deducted from employees' wages and employers' pay to fund the Medicare program.

Unemployment Compensation

Payments made by the government or a fund to unemployed workers who meet certain eligibility requirements.