Brief Principles of Macroeconomics...
Solutions
Brief Principles of Macroeconomics...
Chloe takes $100 of currency from her wallet and deposits it into her checking account. If the bank adds the entire $100 to reserves, the money supply _____, but if the bank lends out some of the $100, the money supply _____.
a. increases, increases even more
b. increases, increases by less
c. is unchanged, increases
d. decreases, decreases by less
The impact of money deposit in the bank and the reserves.
The Federal Reserve is the central bank of the US economy and it is usually known as the Fed. The Fed has the responsibility to keep the economy controlled from the fluctuations and it has to control the money supply of the economy through its monetary policies. The controlling of the money supply is one of the prime most responsibilities of the Fed. The reserve requirement is the determined portion of deposit by the Fed that the banks have to keep with them without using for the credit creation purpose.
Option (c):
When the bank uses the entire money deposited by an individual for the reserve purpose, nothing out of the new deposit will be used to provide new loans, which means that there will be no change in the money supply of the economy. On the other hand, when the bank uses some portion of the deposit to provide loans, the money supply of the economy will increase. This is explained properly in option ‘c’. Thus, option 'c' is correct.
Option (a):
The money supply in the economy increases when the banks accept the deposits from the public and uses the deposits to provide loans to the needy sections of the economy. Thus, when the entire deposit is used for the purpose of reserves, nothing will be provided as loan. Therefore, the money supply will remain unchanged and when it uses the money to provide loans, the money supply will increase...
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