CFA Practice Question

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CFA Practice Question

Suppose that the reserve ratio is 0.2 and that banks loan out all their excess reserves. If a person deposits $100 cash in a bank, checking account balances will increase by ______.
Correct Answer: $500

In this case, c = 0. The money multiplier is 1/reserve ratio, or 1/0.2 = 5. Thus, a $100 cash deposit generates 5 * $100 = $500 in new checking accounts.

User Contributed Comments 7

User Comment
cbb1 Checking account balances increase by $500, but the money supply (M1) only increases by $400.
danlan Understand the difference between checking account balance change and money supply change
sarath what is checking account balance?
chamad When you open a day to day account (for deposit and withrawal purposes)it's called a chequing account. Checquing account balance is the balance available in chequing account. It"s different than saving account. Generally saving is for the long run sometimes for the short run (exp emergency fund)
bundy its a money multiplier question. they don't specify a in the monely multipier equation so the numeraor is 1. they lend all excess so b = .2 so the denonimator is .2
YOUCANDOIT nice point cbb1
something cbb1: If cash is already part of M1, then how come cash deposit to checking ( part of M1) increases M1 money supply? I get the point that Money mutiplier is 5, therefore checking account increases by 500 and money supply increases too. But some doubtful about the source of money..Alternatively what happens when cash moves between two checking accounts?
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