Question

Suppose that the fed has set the reserve ratio at 10 percent and that banks collectively have $2 billion in excess reserves. What is the maximum amount of new checkable-deposit money that can be created by the banking system

Answer 1

Answer:

Explanation:

Maximum expansion of the money supply is $20 billion x 5, or $100 billion. (c) If the reserve ratio was 10%, then excess reserves would be $40 billion [$60 billion - (.10 x $200 billion)]. The monetary multiplier would be 1/.10 or 10, so the maximum expansion of the money supply is $400 billion [10 x $40 billion].