Question

What happens to checkable deposits in the banking system when the Fed lends an additional​ $1 million to the First National​ Bank, assuming that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not​ change? A. Checkable deposits rise by​ $1 million. B. Checkable deposits rise by​ $10 million. C. Checkable deposits rise by​ $100,000. D. Checkable deposits rise by​ $900,000.

Answer 1

Answer:

The correct answer is option B.

Explanation:

The Fed lends $1 to the First National Bank.

The required reserve ratio is 10%.

There are no excess reserves with the bank.  

This additional amount will cause an increase in the check-able deposits.

Change in check-able deposits

= $\frac{1}{required\ reserve}\ \times\ change\ in\ reserves$

= $\frac{1}{0.1}\ \times\ 1$

= $10 million