Question

The RRR remains 20%. Suppose the Fed buys a $50,000 bond. Suppose also that all economic agents (firms,consumers,etc.) starting with the bond trader who sells the Fed the bond, convert 10% of their proceeds to cash.

How much will checkable deposits increase?

How much will reserves increase?

How much will loans increase?

Answer 1

In the question RRR is 20% and the bonds into cash is 10%

a. The checkable deposits will be 50,000$-10%(in the form of cash)

i.e. 10% 0f 50,000$ is $5000

therefore, the increase in checkable deposits will be $50,000-$5000= $45,0000.

b. As the checkable deposits are $45,000 in the banks so the 20% of 45,000$ will be the increase in reserves.

implies 20/100 * 45000$ = 9000$ in the economy.

c.The rest amount in the banks will be the amount available for the loans

means $45000- $9000 = $36000.