CE 10-36

The above table shows the balance sheet of a banking system which has an excess reserve of $500.

Suppose the public withdraw $1 000 cash from the banking system. If the banks do not hold any excess reserves and there is no cash leakage, what will happen eventually after the process of deposit contraction is completed?

A. Bank deposits will fall by $5 000.

B. Bank loans will fall by $2 500.

C. The money supply will fall by $1 500.

D. Both B and C are correct.