CE 04-06

The balance sheet of Economy A’s banking system is shown below. The public in this economy always $50 million in cash. Initially, the excess reserve of the banks is $100 million.

Suppose $140 million worth of deposits is withdrawn from these banks and remitted overseas.

(a) Calculate the maximum possible amount of money supply in Economy A after the remittance. (4 marks)

(b) Explain briefly the process of deposit contraction of the above withdrawal. (4 marks)