Question

The Federal Reserve buys $30.00 million in Treasury securities. If the required reserve ratio is 20.00%, and all currency is deposited into the banking system, and banks hold excess reserves of 10%, then the maximum amount the money supply can increase is $ million. (Insert your answer in millions; if you think the answer is $30 million, just enter 30. Round your answer to two decimal places.)

Answer 1

Answer:

$100 million

Explanation:

Increase in the total value of checkable deposit is determined by the money multiplier

Reserves = required reserves + excess reserves

Required reserves is the percentage of deposits required of banks to keep as reserves by the central bank

Excess reserves is the difference between reserves and required reserves

Money multiplier = amount deposited / reserve requirement

$30 million / 0.2 + 0.1 = $100 million