Simple deposit multiplier
Suppose that Marissa finds $5,000 in cash in a mattress that was given to her and decides to deposit all of the money into her cousin's checking account. If the assumptions of the simple deposit multiplier hold and the required reserve ratio is set at 10%, the banking system will increase/decrease the money supply by ____________. (Note: Currency held by the public is counted in the money supply as part of M1.)
Which of the following assumptions is necessary for a change in checkable deposits to be exactly determined by the simple deposit multiplier?
No borrowers hold money as currency but instead deposit all money in checking accounts.
Borrower default rates are stable.
People's marginal propensity to consume does not rise with income.
If the previous assumption did not hold, the change in the money supply would be ________ than the amount you indicated, because:
If borrower default rates were not stable, then the money supply expansion process would be disrupted
If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system
If people kept some of their new money in the form of currency rather than depositing it in their checking accounts, this money could not be lent out by banks
Simple deposit multiplier
Suppose that Marissa finds $5,000 in cash in a mattress that was given to her and decides to deposit all of the money into her cousin's checking account. If the assumptions of the simple deposit multiplier hold and the required reserve ratio is set at 10%, the banking system will increase/decrease the money supply by ____________. (Note: Currency held by the public is counted in the money supply as part of M1.)
Which of the following assumptions is necessary for a change in checkable deposits to be exactly determined by the simple deposit multiplier?
No borrowers hold money as currency but instead deposit all money in checking accounts.
Borrower default rates are stable.
People's marginal propensity to consume does not rise with income.
If the previous assumption did not hold, the change in the money supply would be ________ than the amount you indicated, because:
If borrower default rates were not stable, then the money supply expansion process would be disrupted
If people's marginal propensity to consume rose with income, they would save less, removing money from the financial system
If people kept some of their new money in the form of currency rather than depositing it in their checking accounts, this money could not be lent out by banks
