<p>Hello everybody!</p>
<pre><code>I am doing AP Macroeconomics and I have encountered some questions that are really similar but for some reason that I would like to know, involve different approaches. Here are the questions that I need somebody to kindly clarify to me. :)
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<p>What is the difference between these 2 scenarios:</p>
<p>1) In Country Z, the required reserve ratio is 10 percent. Assume that the central bank sells $50 million in government securities on the open market.</p>
<p>Find the maximum possible change in the money supply</p>
<p>Well, my answer would be to multiply 50 by one/ RRR = $500,000, then subtract 50 from 500,000 = $450,000. HOWEVER, the answer = $500,000</p>
<p>Here is the 2nd question:</p>
<p>2) Assume that the RRR= 20 percent and that banks hold no excess reserves and Kim deposits $100 of cash from her pocket in to her checking account.</p>
<p>Find the maximum total change in demand deposits in the banking system and find the maximum change in the money supply</p>
<p>Alright for the first part of the question I said 100 * 1/20%
For the second part, I said maximum change in money supply = $400. Then, obviously, a subtraction has taken place. Why didn't the answer key subtract from the original deposit in the question number 1? Shall I just list all my steps in the exam tomorrow in case.. ?</p>
<p>Thank you for your time</p>