Chapter 11, Problem 5PA

### Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985

Chapter
Section

### Brief Principles of Macroeconomics...

8th Edition
N. Gregory Mankiw
ISBN: 9781337091985
Textbook Problem

# You take $100 you had kept under your mattress and deposit it in your bank account. If this$100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase?

To determine

The impact of deposits in the bank on money supply.

Explanation

The banks are the financial institutions that accept the deposits from the general public and provide loans to the general public, in order to meet their various needs. People deposit the money in bank in order to earn the interest rate and the bank uses these deposits to lend out loans other than the portion kept as reserves, according to the Fed’s directions.

When \$100 remains with the individual under his pillow, it does not impact the money supply of the economy. When it is being deposited in the bank, it works as the lonable fund with the bank and the bank lends out the portion of the deposit after the reserves to create loans to the public. Here, the reserve ratio is 10 percent. The reserve ratio and the money multiplier are inversely related...

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