Question

Suppose the reserve requirement is 15​%. What is the effect on total checkable deposits in the economy if bank reserves increase by ​$50 ​billion?

Answer 1

Answer:

Total Check-able deposits to increase by $333.5 billion

Explanation:

If the bank reserves increase by $50 billion, the total check-able deposits will increase by 50 * the credit multiplier.

Credit multiplier is the measure by which an increase in total money supply can be measured relative to an increase in banks' excess reserves.

Credit Multiplier = 1 / reserve ratio

Credit Multiplier = 1 / 0.15 = 6.67

So an increase in excess reserves of 50 billion will have a net effect of 50 * 6.67 = $333.5 billion. This will be the net increase in total check-able deposits or the money supply.

Hope that helps.