CE 02-10

The balance sheet of a banking system is as follows:

(a) The public deposits $10 million of cash into the banking system.

(i) Suppose the banks do not hold excess reserves. Calculate the maximum possible change in the money supply. Explain your answer. (5 marks)

(ii) Give TWO possible reasons why the actual change in the money supply could be less than the maximum possible change. (4 marks)