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

Accounting Dec 18, 2020

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?

Expert Solution

To stop further lending activity the Fed should increase the reserve ratio to 0.125. This makes the total reserves exactly what the required reserve ratio is and stops the bank from lending any further. As the public deposits money into the bank the Fed just needs to keep increasing the required reserve ratio so that the total reserves are equal to the required reserves.

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