BANKING GENERAL KNOWLEDGE
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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The money supply would rise by $10, 000.
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The money supply would fall by $10, 000.
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The money supply would not be affected by the deposit.
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The money supply would fall, but by less than the $10, 000 deposit.
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Detailed explanation-1: -The money supply would not be affected by the deposit.
Detailed explanation-2: -If the reserve requirement is 10%, then the money supply reserve multiplier is 10 and the money supply should be 10 times reserves. When a reserve requirement is 10%, this also means that a bank can lend 90% of its deposits.
Detailed explanation-3: -The question asks what is the immediate effect of the cash deposit on the M1 measure of money supply. The official answer is “There is no change in the M1 measure of the money supply.
Detailed explanation-4: -Every cash deposit made reduces the currency in circulation and raises the checkable deposits by exactly the same amount. In a similar way, the withdrawal of cash from your bank does not change the money supply, as your checkable balance is decreased by the amount of your ATM cash withdrawal.
Detailed explanation-5: -The reserve ratio: If the central bank raises the reserve ratio, this will have a restrictive effect on the money supply, since banks will have to take steps to acquire more reserves and will have to restrict lending. This is turn will reduce the amount of demand deposits.