Does a rise in money supply always raise the price level in the same proportion?

No. Prices rise in proportion only when velocity and real output are unchanged; if output also rises, the price increase is smaller than the rise in money supply.

Why does a higher reserve ratio reduce the money supply?

A higher reserve ratio lowers the deposit multiplier, so the same monetary base supports fewer deposits and the money supply falls.

S4 Economics: Money and Banking Paper 2 (barter, money aggregates and deposit-creation applications)

2026-11-03

S · 4

This paper begins with the problems of barter and matches them to the four functions of money, then tests money aggregates and reverse deposit-creation calculations. Always divide the first deposit by the reserve ratio, and divide reserves by the reserve ratio for the total deposits; give whole-number answers, and every value here is checked by computer.

Quick answer　Double coincidence of wants; unit of account; total deposits 8,000 with 6,000 created; M1 is 2,000 billion; multiplier 8, total 32,000 with 28,000 created; deposits of 4,000 billion; M2 is 10,000 billion; from 5,000 billion down to 4,000 billion, a fall of 1,000 billion; P equals 2.0; the error is ignoring the 200 required reserve, so only 800 can be lent.

01　Paper details (check answers afterwards)

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

02　Questions (10 items)

FoundationWhat is the main problem of barter?
FoundationA supermarket prices every good in the same money unit. Which function of money is at work?
FoundationThe required reserve ratio is 25 percent and a customer deposits 2,000 dollars. What is the final total of deposits in the banking system?
FoundationIn a place with 500 billion in cash and 1,500 billion in demand deposits, what is M1?
IntermediateWith a reserve ratio of 12.5 percent and a first deposit of 4,000 dollars, what are the total deposits and the newly created deposits?
IntermediateThe banking system holds 600 billion in reserves at a reserve ratio of 15 percent. What are total deposits?
IntermediateWith 800 billion cash, 1,200 billion demand deposits, 3,000 billion savings deposits and 5,000 billion time deposits, what is M2?
ChallengeThe monetary base is 1,000 billion and the reserve ratio rises from 20 to 25 percent. By how much does the money supply fall?
ChallengeMoney stock is 800 billion, velocity is 5 and real output is 2,000 billion. What is the price level?
Error redoA bank receives a 1,000 dollar deposit at a 20 percent reserve ratio, and the clerk lends out the whole 1,000 dollars. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Both parties must want what the other holds at the same time, the double coincidence of wants.	Money as a medium of exchange exists to solve this matching problem.
2	Unit of account.	One common unit makes the value of different goods directly comparable.
3	8,000 dollars, of which 6,000 dollars is newly created.	Total deposits equal the first deposit divided by the reserve ratio: 2,000 divided by 0.25 gives 8,000.
4	2,000 billion.	M1 counts only cash and demand deposits; savings and time deposits are excluded.
5	Total deposits 32,000 dollars, with 28,000 dollars newly created.	The multiplier is one divided by 0.125, which is 8; 4,000 times 8 gives 32,000, and subtracting the original 4,000 leaves 28,000.
6	4,000 billion.	Total deposits equal reserves divided by the reserve ratio: 600 divided by 0.15 gives 4,000.
7	M2 is 10,000 billion, of which M1 is 2,000 billion.	M2 equals M1 plus savings and time deposits: 2,000 plus 3,000 plus 5,000 gives 10,000.
8	It falls from 5,000 billion to 4,000 billion, a drop of 1,000 billion.	The multiplier falls from 5 to 4; 1,000 times 5 minus 1,000 times 4 leaves 1,000.
9	P equals 2.0.	From MV equals PY, P equals MV divided by Y: 4,000 divided by 2,000 gives 2.0.
10	The clerk ignores the required reserve: at most 800 dollars may be lent, and 200 dollars must be kept.	Lending everything leaves actual reserves below the legal minimum and exposes the bank to a run.

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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Questions and answers are written originally by the TutorZone team and are not taken from any school, publisher or examination authority paper. Every value is checked by computer.