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Written Assignment Unit 5

The document discusses how bank deposits and money supply are impacted by withdrawals through the deposit multiplier effect. It explains that for a $25,000 withdrawal from a bank with a 10% reserve requirement, the total decrease in deposits across the banking system is $250,000. This results in a $2,500,000 contraction in the money supply. The deposit multiplier demonstrates how individual transactions like withdrawals can substantially impact the broader monetary system due to the interconnected nature of bank lending and deposits.

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Hamza Yasine
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157 views2 pages

Written Assignment Unit 5

The document discusses how bank deposits and money supply are impacted by withdrawals through the deposit multiplier effect. It explains that for a $25,000 withdrawal from a bank with a 10% reserve requirement, the total decrease in deposits across the banking system is $250,000. This results in a $2,500,000 contraction in the money supply. The deposit multiplier demonstrates how individual transactions like withdrawals can substantially impact the broader monetary system due to the interconnected nature of bank lending and deposits.

Uploaded by

Hamza Yasine
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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To understand how banks create money and the subsequent impact of a withdrawal on the

deposit multiplier, deposits, and the money supply, let's delve into the scenario provided.

The deposit multiplier, determined by the required reserve ratio, illustrates the extent to which
an initial deposit can result in a multiplied increase in the money supply through subsequent
loans. In this case, with a required reserve ratio of 10 percent, the deposit multiplier can be
calculated as the reciprocal of the reserve ratio:

Deposit Multiplier = 1 / Reserve Ratio

Deposit Multiplier = 1 / 0.10

Deposit Multiplier = 10

This means that for every initial deposit, the banking system can create up to ten times that
amount in loans, contributing to the expansion of the money supply.

Now, when you withdraw $25,000 from Comerica Bank, this withdrawal leads to a decrease
in deposits within the banking system. The initial deposit multiplier helps in understanding
the total decrease in deposits resulting from this withdrawal. As the multiplier is 10, the total
decrease in deposits can be calculated by multiplying the withdrawal amount by the deposit
multiplier:

Total Decrease in Deposits = Withdrawal Amount x Deposit Multiplier

Total Decrease in Deposits = $25,000 x 10

Total Decrease in Deposits = $250,000

This withdrawal of $25,000 from Comerica Bank results in a total decrease of $250,000 in
deposits across the banking system.

The change in the money supply, affected by changes in deposits, can be calculated using the
deposit multiplier. When money is withdrawn from the bank, it reduces the reserves available
for lending. Consequently, the money supply contracts by an amount determined by the
deposit multiplier. In this scenario, given the initial deposit multiplier of 10:
Change in Money Supply = Total Decrease in Deposits x Deposit Multiplier

Change in Money Supply = -$250,000 x 10

Change in Money Supply = -$2,500,000

Therefore, the withdrawal of $25,000 leads to a contraction in the money supply by


$2,500,000 across the banking system.

In summary, the deposit multiplier influences how initial deposits contribute to the creation of
money through loans. A withdrawal from Comerica Bank of $25,000 results in a substantial
decrease in deposits within the banking system and consequently leads to a notable
contraction in the money supply, showcasing the interconnectedness between individual
transactions and the broader monetary system.

Resources :

https://positivemoney.org/how-money-%20works/how-banks-%20create-money/

https://www.bankofengland.co.uk/explainers/how-is-money-created

https://www.imf.org/en/Publications/fandd/issues/Series/Back-to-Basics/Banks

http://www2.harpercollege.edu/mhealy/eco212i/lectures/ch13-17#:~:text=1.-,Banks%20can
%20create%20money%20by%20lending%20more%20than%20the%20original,depositors
%20worried%20about%20their%20funds.

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