Question

The commercial banking system, because of a recent change in the required reserve ratio from 8 percent to 10 percent, finds that it is $50 million short of reserves. If it is unable to obtain any additional reserves, it must reduce deposits and money supply by:A. $250 million B. $625 million C. $500 million D. $50 million

Answer 1

Answer:

C. $500 million

Explanation:

We can compute this by calculating the new credit multiplier.

Credit multiplier = 1 / Reserve ratio

Credit multiplier = 1/0.10 = 10

This is the new credit multiplier. Which means in order to meet the reserve requirement by $50 million the total money supply will decrease by 50 * 10 = $ 500 million.

(500 / 10 = $50 million which is the desired effect required)

Hope this helps.