How do I find opportunity cost?

Divide the quantity of the other good given up by the quantity of the good being produced.

Does a tariff always raise the local price?

Yes, a tariff raises the landed cost of imports, so the local price rises and imports fall.

S4 Economics, Paper 3: deposit creation and policy tools

2026-11-01

The deposit multiplier is the reciprocal of the reserve ratio; only excess reserves create deposits; open market operations and the discount rate are the main tools.

Focus　Find the multiplier before multiplying deposits, and trace policy moves from reserves to the money supply.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10
Suggested time	25
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S4 Economics: Money and Banking
Level	S4

02　Questions (10 items)

FoundationThe required reserve ratio is 20% and the banking system receives $1,000 of new deposits. Find the deposit multiplier and the maximum new deposits.
FoundationThe reserve ratio is 10% and the initial deposit is $600. Find the maximum new deposits created.
FoundationAn economy has $500 of cash and $2,000 of demand deposits. Find M1.
FoundationTotal deposits are $8,000 and the required reserve ratio is 15%. Find the required reserves.
IntermediateDeposits are $5,000, the required ratio is 10% and the bank holds $700 of reserves. Find excess reserves and the maximum additional deposits.
IntermediateThe central bank sells government bonds in the open market. What happens to the money supply?
IntermediateThe central bank raises the discount rate. What happens to the money supply?
ChallengeMV = PY with M = 500 and V = 4. Find PY; if V is constant and Y rises 5%, by how much must M rise?
ChallengeMoney supply grows 12% and real output grows 3%. Using the quantity theory, what is the inflation rate?
Error redoA student says: increasing the money supply must raise real output in the long run. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Multiplier = 1 / 0.2 = 5, so maximum new deposits = 1,000 x 5 = $5,000.	The deposit multiplier is the reciprocal of the reserve ratio.
2	Multiplier = 1 / 0.1 = 10, so maximum new deposits = 600 x 10 = $6,000.	A smaller reserve ratio gives a larger multiplier and more created money.
3	M1 = 500 + 2,000 = $2,500.	M1 covers currency held by the public plus demand deposits.
4	Required reserves = 8,000 x 0.15 = $1,200.	Required reserves equal deposits multiplied by the required reserve ratio.
5	Required reserves $500, excess reserves $200, so up to 200 x 10 = $2,000 of extra deposits can be created.	Only excess reserves can support new loans and deposits.
6	Reserves in the banking system fall, so the money supply contracts.	Selling bonds withdraws cash from the banking system and contracts the money supply.
7	Borrowing from the central bank becomes dearer, so lending falls and the money supply contracts.	The discount rate is the rate at which the central bank lends to banks.
8	PY = 500 x 4 = 2,000; with V constant M must rise 5% to 525.	In the equation of exchange the money stock is proportional to the value of output.
9	Inflation is about 12% – 3% = 9%.	Money growth in excess of real output growth shows up mainly in prices.
10	Wrong: money is neutral in the long run, so extra money raises prices rather than lasting real output.	Money is neutral in the long run: more money raises prices, not lasting real output.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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