Answer:
The money supply decreases by $4,500.
Explanation:
The amount of deposits is $8,000.
The required reserve ratio is 10%.
The amount of required reserve
= 10% of $8,000
= [tex]\frac{10}{100}\times 8,000[/tex]
= $800
The amount to be loaned out
= Total deposit - Required reserves
= $8,000 - $800
= $7,200
The money supply is equal to money multiplier times the monetary base.
Money supply
= [tex]\frac{1}{RR} \times Monetary\ base[/tex]
= [tex]\frac{1}{0.1}\times \$ 7,200[/tex]
= $72,000
So, the money supply before withdrawal is $72,000.
After withdrawal of $500, the deposits is
= $8,000 - $500
= $7,500
The amount of required reserve
= 10% of $7,500
= [tex]\frac{10}{100}\times 7,500[/tex]
= $750
The amount to be loaned out
= Total deposit - Required reserves
= $7,500 - $750
= $6,750
Money supply
= [tex]\frac{1}{RR} \times Monetary\ base[/tex]
= [tex]\frac{1}{0.1}\times \$ 6,750[/tex]
= $67,500
So, the money supply after withdrawal is $67,500.
The decrease in money supply
= $75,000 - $67,500
= $4,500
