Consider a simple economy where money consists only of bank deposits and banks’ only assets are reserves and loans. Assume that banks wish to hold reserves in a desired proportion to deposits. In this kind of economy,Group of answer choicesif the quantity of loans depends on the level of activity in the economy then the quantity of deposits and the quantity of money are exogenousthe quantity of money will depend inversely on the quantity of loans made by banksthe quantity of money will be a multiple of bank reserves where the size of that multiple is larger the smaller is banks’ desired reserves to deposits ratioif the quantity of money is endogenous then in this simple economy this means that the quantity of money is determined by the quantity of bank reserves
Question
Consider a simple economy where money consists only of bank deposits and banks’ only assets are reserves and loans. Assume that banks wish to hold reserves in a desired proportion to deposits. In this kind of economy,Group of answer choicesif the quantity of loans depends on the level of activity in the economy then the quantity of deposits and the quantity of money are exogenousthe quantity of money will depend inversely on the quantity of loans made by banksthe quantity of money will be a multiple of bank reserves where the size of that multiple is larger the smaller is banks’ desired reserves to deposits ratioif the quantity of money is endogenous then in this simple economy this means that the quantity of money is determined by the quantity of bank reserves
Solution
The correct answer is: "The quantity of money will be a multiple of bank reserves where the size of that multiple is larger the smaller is banks’ desired reserves to deposits ratio".
Here's why:
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In this simple economy, banks hold reserves in proportion to deposits. This means that the amount of reserves a bank holds is directly related to the amount of deposits it has.
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The quantity of money in this economy consists only of bank deposits. Therefore, the quantity of money is directly related to the amount of deposits.
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The quantity of loans depends on the level of activity in the economy. However, this does not directly determine the quantity of deposits or the quantity of money.
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The quantity of money is not inversely related to the quantity of loans. More loans do not mean less money, or vice versa.
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The quantity of money is not determined by the quantity of bank reserves. Rather, the quantity of bank reserves is a fraction of the quantity of deposits, which in turn determines the quantity of money.
Therefore, the quantity of money will be a multiple of bank reserves where the size of that multiple is larger the smaller is banks’ desired reserves to deposits ratio. This is because the more reserves a bank holds in relation to its deposits, the less money there is in the economy. Conversely, the less reserves a bank holds in relation to its deposits, the more money there is in the economy.
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Suppose a bank has $10,000 in deposits and $1,000 in reserves. The required reserve ratio is 5%. Which of the following occurs if the required reserve ratio is increased to 10%?Question 48Select one:a.The bank's required reserves will decrease to $500.b.The bank's excess reserves will increase to $1,000.c.The bank's required reserves will increase to $1,000.d.The bank's ability to create loans increases by 5%.
The ________ the amount of excess reserves a bank holds, the ________ the size of the deposit multiplier.
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