Question

16-

If the reserve requirement for demand deposits is 10 percent,

what is the maximum change in the money supply that the banking system can create if

a. the Federal Reserve puts $1,000,000 of new reserves in the banking system

b. $1,000,000 in cash is deposited in checking accounts

c. IBM borrows $1,000,000 from an insurance company

Answer 1

a). Additional excess reserve = 1,000,000

Maximum change in the money supply = additional excess reserve/reserve requirement = 1,000,000/10% = 10,000,000

b). Additional excess reserve created = cash in checking account*(1-reserve requirement) = 1,000,000*(1-10%) =

900,000

Maximum change in the money supply = additional excess reserve created/reserve requirement = 900,000/10% = 9,000,000

c). Since IBM has borrowed from an insurance company and not a bank there will be no change in the money supply, so maximum change in the money supply is 0.