It doesn't have to loan that amount out, it can loan less than that, they can't loan more than that. The statement is saying it loans out the whole $850. Now remember, this is before that check clears at the other bank. So this first bank still has the $850 in cash, which is an asset. They also have $150 of their required reserves they had to keep, so they've still got $1000 in cash. Now, they made a loan to someone, that loan is also an asset of the bank. So the question is then, what happened to the asset side of the balance sheet for this initial bank before that new loan was deposited in another bank? Well, we saw the reserves are $1,000, the $850 in cash that hasn't left the bank yet, the excess reserves of the bank that they loaned out, plus $150. But it also has a new asset in the form of loans of $850. Now after that check on the new loan is deposited in another bank, then the asset side of the original bank is going to change because that $850 is going to go to the new bank. So D is the answer to this question. MC 46 : Question number 46 is a multiple answer question in which you're supposed to select all of the following that are correct statements about the money multiplier. Statement A says, if you have a monetary base of $5 million and a money multiplier of 5, that means that this money supply will be $1 million. We have a formula for the relationship between these three things. That formula is MS, the money supply, is equal to MB, which is the monetary base, which is the banking system reserves plus currency held by the public times small n, which is the money multiplier. That's the number of times the monetary base can be expanded and magnified to produce a given money supply level. In this case, we know that the monetary base is 5 million, and we know the money multiplier is 5. So 5 times 5 is 25 million dollars, not 1 million dollars, so a is not a correct statement about the money multiplier. Statement b says that the magnitude of the money multiplier, how big or how small it is, it's constantly decreasing over time.
That's not the case. Some points in time, some periods of time, it is decreasing but now it's increasing. So that money multiplier can be fluctuating a lot over any given period of time. So that statement's not a true statement. Statement c says the money multiplier, that's our small limiter formula, is influenced by the public's switching between checkable and noncheckable, and that's a key here, deposits at their banks. In chapter two when we talked about different ways of measuring the money supply the basic one, the simplest one, is M1. That consists of currency, travelers’ checks, demand deposits and other checkable deposits at depository institutions. So we take a look at our formula. MS equals MB times M, MS being M1 which is checkable deposits done for any given monetary base MB.