Question: Tracy Williams deposits $500 that was in her sock drawer into a checking account at the local bank.
a. How does the deposit initially change the T-account of the local bank? How does it change the money supply?
b. If the bank maintains a reserve ratio of 10%, how will it respond to the new deposit?
c. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan, by how much could the total money supply in the economy expand in response to Tracy's initial cash deposit of $500?
d. If every time the bank makes a loan, the loan results in a new checkable bank deposit in a different bank equal to the amount of the loan and the bank maintains a reserve ratio of 5%, by how much could the money supply expand in response to Tracy's initial cash deposit of $500?