Question

Suppose you deposit your paycheck, drawn on another bank. The total money supply in the banking system will ___________ because:

a. Assets of your bank would increase by more than the amount withdrawn from the other bank.
b. An increase in the assets of your bank by the amount of your paycheck would simply decrease the assets of another bank by the same amount.
c. Assets of the other bank would decrease by a fraction of the amount deposited at your bank.

Answer 1

Option B, An increase in the assets of your bank by the amount of your paycheck would simply decrease the assets of another bank by the same amount, is correct.

Step-by-step explanation:

The total money supply in the banking system will remain the “same” because it is given that paycheck is drawn from another bank. So, if a person withdraws money from another bank it implies that there is a decrease in money supply in the banking system and when the cheque is deposited in the other bank so again the money supply will increase in the banking system. However, the amount of money supply will remain the same. Therefore, option B is the right answer.