Answer to Question #118252 in Macroeconomics for Kalpana

Question

Consider an individual who immigrates to Canada and deposits ​$7 comma 500 into the Canadian banking system. Suppose that all commercial banks have a target reserve ratio of 20 percent and that individuals do not hold any cash from the loans borrowed from the banking system.
The eventual total change in deposits of the banking system after this impact is ​$
nothing.
The eventual total change in reserves of the banking system after this impact is ​$
nothing.
The eventual total change in loans of the banking system after this impact is ​$
nothing.
Now suppose that all commercial banks still have a target reserve ratio of 20 ​percent, but that individuals choose to hold cash equal to 5 percent of their bank deposits.
In this​ case, with the cash​ drain, the eventual total change in deposits of the banking system after the impact is ​$
nothing.
We can conclude from this example that the ability of the banking system to create money is
▼
reduced
amplified
by the presence of a cash drain.

Answer 1

by the presence of a cash drain.