Question

Suppose that the required reserve ratio is 10 percent and you withdraw $25,000 from Comerica Bank.

What is the deposit multiplier?
What is the total decrease in deposits in the banking system?
What is the change in the money supply?

Answer 1

The deposit multiplier is 10, the total decrease in deposits in the banking system is-$250,000 and the change in the money supply is -$225,000.

Money multiplier

a. Money multiplier:

Money multiplier= 1/Required reserve ratio

Money multiplier= 1/0.10

Money multiplier= 10

b. Change in deposit:

Change in deposit=10×-$25,000

Change in deposit=-$250,000

c. Change in money supply:

Change in money supply=-$250,000+$25,000

Change in money supply=-$225,000

Therefore the deposit multiplier is 10, the total decrease in deposits in the banking system is-$250,000 and the change in the money supply is -$225,000.

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