Suppose all banks maintain a 100 percent reserve ratio. If an individual deposits $1,000 of currency in a bank,

Question

a. the money supply is unaffected.
b. the money supply increases by more than $1,000.
c. the money supply decreases by more than $1,000.
d. the money supply decreases by less than $1,000.
e. the money supply increases by less than $1,000.

Answer 1

If all banks maintain a 100 percent reserve ratio, it means that banks are required to keep all deposits in reserve and do not engage in lending out any portion of those deposits.

When an individual deposits $1,000 into a bank, the bank holds the entire $1,000 and does not create any additional money through lending. Therefore, the total money supply remains unchanged after the deposit because the same amount of money just shifts from being held as currency by the individual to being held as a deposit in the bank.

Given this understanding, the correct answer is:

a. the money supply is unaffected.