Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits, and that banks hold no excess reserves and households hold no currency. a. What is the money multiplier? What is the money supply? b. If the Fed now raises required reserves to 20 percent of deposits, what is the change in reserves and the change in the money supply?

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Leonard Farley

Business

2 August, 17:20

Assume that the banking system has total reserves of $100 billion. Assume also that required reserves are 10 percent of checking deposits, and that banks hold no excess reserves and households hold no currency. a. What is the money multiplier? What is the money supply? b. If the Fed now raises required reserves to 20 percent of deposits, what is the change in reserves and the change in the money supply?

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Dwayne Bradshaw · Answer 1

The money multiplier is the amount of money that is generated from the reserves of a bank:

$100/0.10 - $100 = $900 billion

The money supply is

$100/0.10 = $1000 billion of $1 trillion

If the reserves is changed to 20%, the money multiplier and money supply will decrease