Chapter 17 Practice Problems
1. Follow the impact of a $100 cash withdrawal through the entire banking system,
assuming that the reserve requirement is 10 percent and that banks have no desire to hold excess
reserves.
Deposits fall by $100 and reserves fall by $100. The bank (Bank A) needs to increase its
reserves by $90 in order to meet the required reserve ratio. To raise the $90, Bank A will sell
$90 of securities to someone. The deposit account of the person who purchased the securities
will fall by $90, as will the reserve balance of his bank, Bank B. Bank B now needs to increase
its reserves by $81 in order to meet the reserve requirements so it will sell $81 of securities. This
continues until deposits contract by $100/0.1 = $1000.
2. Compute the impact on the money multiplier of an increase in desired currency holdings
from 10 percent to 15 percent of deposits when the reserve requirement is 10 percent of deposits,
and banks’ desired excess reserves are 3 percent of deposits.
When desired currency holdings = 10% of deposits, m =
78.4
03
.
0
1
.
0
1
.
1.1 =
++
+
When desired currency holdings = 15% of deposits,
m
= 11.4
03
.
0
1
.
0
15
.
15.1 =
++
+
