Question

Assume that the following data describe the condition of the banking system: Total reserves $100 billion Transactions deposits $800 billion Cash held by public $400 billion Reserve requirement 0.10 Suppose the Fed wanted to stop further lending activity. To do this, what reserve requirement should the Fed impose?

Answer 1

Answer:

12.5%

Explanation:

The computation of the reserve requirement is shown below:

We know that

Total reserves = New reserve requirement × transaction deposits

$100 billion = New reserve requirement × $800 billion

So, the New reserve requirement would be

= $100 billion ÷ $800 billion

= 0.125 or 12.5%

All other information which is given is not relevant. Hence, ignored it