Question

Decisions for Tomorrow Suppose a person who is developing a card game crowdfunds $40,000 and holds this as cash for future

expenses. If this $40,000 comes from donors' checking accounts, by how much will the money supply fall if the reserve ratio is 10
percent?
Instructions: Enter your response as a whole number.
The money supply will decrease by $
4

Answer 1

Step-by-step explanation:

If the reserve ratio is 10 percent, this means that the bank is required to hold onto 10 percent of the funds deposited in reserve and can lend out the remaining 90 percent. Therefore, if the $40,000 received from donors' checking accounts is deposited into a bank, the bank will hold $4,000 (10% of $40,000) in reserve and can lend out the remaining $36,000.

Since the initial $40,000 was created by donors depositing money into their checking accounts, it represents an increase in the money supply. However, when the money is deposited into the bank and the reserve ratio is applied, the total money supply will decrease by the amount held in reserve. Therefore, the money supply will decrease by $4,000.