Question

If each bank in the United States had to keep 100 percent of checkable deposits as reserves, each $1 the Fed injected into new reserves could increase the money supply by _____.

Answer 1

Answer:

$1

Explanation:

the effect that money injected by the Fed has on the economy can be calculated by multiplying the total money injected times the money multiplier:

money multiplier = 1 / reserve ratio = 1 / 100% = 1

change in the money supply per $1 = $1 x 1 = $1

banks have the capacity to create money through multiple loans using the same money, but if the reserve ratio is 100%, then their money making capacity is offset.