BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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an increase in the money supply of $5 million
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an increase in the money supply of less than $5 million
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a decrease in the money supply of $5 million
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a decrease in the money supply of more than $5 million
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Detailed explanation-1: -If the reserve requirement is 20 percent, and banks keep no excess reserves, an increase in an initial inflow of $100 into the banking system will cause an increase in the money supply of: $500.-The money multiplier is 1/r=1/. 2=5, which gives an increase in total money of $500.
Detailed explanation-2: -If the Fed sells $10 million in bonds to a bank, and the required reserve ratio is 20 percent, then the banking system can: decrease the money supply by up to $50 million.
Detailed explanation-3: -The deposit multiplier is the inverse of the reserve requirement ratio. For example, if the bank has a 20% reserve ratio, then the deposit multiplier is 5, meaning a bank’s total amount of checkable deposits cannot exceed an amount equal to five times its reserves.
Detailed explanation-4: -What happens to the money multiplier when the reserve requirement increases from 20% to 25%? It decreases from 5 to 4.