Assume that the banking system has total reserves of $100 billion
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The money multiplier is 1 / 0.1 = 10 since the total reserves are 100 billion dollars and the required reserve is 10 %. The money supply would be 10 x 100 billion dollars = 1000 billion dollars.
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The money multiplier is 1 / 0.1 = 10 since the total reserves are 100 billion dollars and the required reserve is 10 %. The money supply would be 10 x 100 billion dollars = 1000 billion dollars.
b. If the FED raises required reserves to 20 % of deposits, the money multiplier would be 1 / 0.20 = 5.
The final result is 100 billion dollars x 5 = 500 billion dollars.
The decline in the money supply is 1000 billion dollars - 500 billion dollars = 500 billion dollars.
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