Question

The RRR is 20%. Total demand deposits in the economy equal $2 billion. Banks in the economy are fully lent up (i.e., are holding no excess reserves). The Fed then lowers the RRR to 10%. As a result, the money supply, assuming that banks continue to be fully lent up and that there are no cash leaks, shall __________________ . (Hint: First calculate bank's cash reserves as 20% of $2 billion = $400 million. With a lower RRR of 10%, banks' required reserves would fall to 10% of $2 billion = $200 million. Therefore, $400 million - $200 million = $200 million shall become banks' excess reserves. Then simply use the formula 'change in money supply = change in excess reserves x money multiplier = +$200 million x 1/0.10).

rise by $200 million

rise by $2 billion

fall by $2 billion

fall by $200 million

Answer 1

So ans is B

Rise by $ 2 billion