Suppose you have $8,000 in your checking account. You withdraw $500 cash from your account and hide it under your pillow for future use. If the required reserve ratio is 10%, then what will be the maximum impact on money supply today as a result of your action

the money supply decreases = $4,500

Explanation:

The calculation of given question is given below:-

Money multiplier = 1 : Required reserve ratio

= 1 : 0.1

= 10

Deposited amount = $8,000

Required Reserve ratio = 10%

Reserve = deposited amount * money multiplier

= $8,000 * 0.1

= $800

Loaned amount by the bank = deposited amount - Reserve

= $8,000 - $800

= $7,200

So, Money supply = money multiplier * monetary base

= 10 * $7,200

= $72,000

Before withdrawal the money supply = $72,000

Withdraw from bank = $500

Deposit amount will reduce = $7,500

Required Reserve ratio = 10%

Reserve = $7500 * 0.1

= $750

Loaned amount by the bank = $7,500 - $750

= $6,750

Money supply = money multiplier * monetary base

= 10 * $6,750

= $67,500

After withdrawal the money supply = $67,500

Decline is the money supply

= $72,000 - $67,500

= $4,500

So, the money supply decreases = $4,500