Question

1. Suppose you take cash from your piggy-bank (or sofa cushions) and deposit it into a bank thereby removing this currency from circulation. Does this have the effect of reducing the money supply? Explain your reasoning.

2.Describe the monetary multiplier and the relationship between it and the reserve ratio. An individual bank only makes loans up to the amount of its excess reserves. Suppose it receives a deposit of $1000, if it's required to hold 10% it cannot lend out more than $900. If it does otherwise, it runs the risk of over-extending itself. But we know that we use the multiplier to calculate the loans possible from the entire financial system of banks. Explain the reasoning behind this difference and why the system is able to create so much money.