Question

?The RRR is 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.

b. How much will checkable deposits increase?

c. How much will reserves increase?

d. How much will loans increase?

Answer 1

Fed buys a $50,000 bonds.

RRR = 20% or 0.2

firms, consumers etc, convert 10% of $50000 into cash, thus 10% is not deposited into banks.

so , 50000 -10% = 45000 .

so, $45000 are deposited into bank .

b) CHekable deposits increase by $45000.

c) Reserves will increases by = 45000 * 0.2 = 9000

so, reserves will increase by $9000.

d) Loans will increase by the amount of excess reserves .

excess reserves = Deposits - minimum reserves

excess reserves = 45000 - 9000 = 36000

so, the loans will increase by $36000.