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Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383

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BuyFindarrow_forward

Economics (MindTap Course List)

13th Edition
Roger A. Arnold
ISBN: 9781337617383
Textbook Problem

If reserves decrease by $3 million and the required reserve ratio is 8 percent, what is the change in the money supply? What does the simple deposit multiplier equal?

To determine

The change in money supply.

Explanation

It is given that the reduction in reserves (ΔR) is $ 3 million, and the required reserve ratio is 8 percent.

The change in money supply can be calculated by substituting the respective values in Equation (1) as follows:

Change in money supply=1r×(ΔR)        (1)

Change in money supply=10.08×(3)=37.5

Thus, when the reserves decrease by $3 million and the required reserve ratio is 8 percent, the money supply decreases by $37

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