Money creation and contraction: Practice Questions

If a customer transfers \(HK\$ 10,000\) from his savings account to his current (demand deposit) account in the same licensed bank, what are the immediate effects on the monetary base and the money supply (M1)?

In a simplified banking system where banks do not hold excess reserves and there is no cash leakage, if the required reserve ratio is \(25\%\), what is the maximum banking multiplier?

If the central bank increases the required reserve ratio, which of the following combinations correctly describes the impact on the banking system's maximum lending capacity and the monetary base?

If the central bank increases the required reserve ratio for all commercial banks, which of the following statements is correct?

Suppose the required reserve ratio is \(20\%\) and banks do not hold excess reserves. If the central bank lowers the required reserve ratio to \(10\%\), what is the maximum possible percentage increase in the money supply (total deposits), assuming no cash leakage?

Following a significant economic downturn, the central bank reduces the required reserve ratio to encourage lending and boost the money supply. However, concurrently, commercial banks become highly risk-averse, leading them to hold a substantial amount of excess reserves, and the public's confidence in the banking system diminishes, causing a sharp increase in cash withdrawals. Evaluate the overall effectiveness of the central bank's policy in expanding the actual money supply, explaining how the other factors might impede or reverse the intended effect.

Identify one behavioral assumption regarding the public that must hold true for the banking system to achieve the maximum possible credit creation following an initial deposit.

An economy has an initial required reserve ratio (RRR) of 10%, a cash-to-deposit ratio ($c $) of 20%, and commercial banks hold voluntary excess reserves equal to 5% of their deposits. To combat rising inflation, the central bank increases the RRR to 12%. However, concurrently, an improvement in financial technology leads to a reduction in both the public's cash-to-deposit ratio to 15% and the banks' voluntary excess reserve ratio to 3%. Calculate the change in the actual banking multiplier due to these combined changes and explain whether the central bank's policy of increasing the RRR was fully effective in contracting the money supply through the multiplier effect.