Money

If the required reserve ratio is 25%, and a depositor withdraws $500 from her bank account, the money supply will decrease by

$1,500 The money multiplier is 1/0.25=4, so checkable deposits will decrease by 4*$500=$2000. However, the money supply decreases by $1500 because $500 of the $2000 is still in the money supply (as currency rather than deposits now).

If the required reserve ratio is 20% and the Federal Reserve buys $100 million of Treasury bills, it can lead to an increase in the money supply of up to ____.

$500 million The money multiplier is 1/0.20=5, so the original $100 million injection into the money supply will turn into $500 million.

If the required reserve ratio that banks adhere to is 10%, then the money multiplier is

10 Using the formula for the simple money multiplier 1/rr, the multiplier is 1/0.10=10.

If the Federal Reserve wants to increase the money supply, it can

Buy t-bills

If households choose to hold more cash in their pockets, the money multiplier becomes weaker.

true

The United States dollar is an example of

fiat money

The monetary base is smaller than the money supply because

banks keep less money in reserves than there are checkable deposits b. of the fractional reserve banking system c. the required reserve ratio is less than one