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If the reserve requirement for demand deposits is 10 percent, what is the maximum change in the money supply that the banking system can create if ? a
If the reserve requirement for demand deposits is 10 percent,
what is the maximum change in the money supply that the banking system can create if ?
a. the Federal Reserve puts $1,000,000 of new reserves in the banking system
b. $1,000,000 in cash is deposited in checking accounts
c. IBM borrows $1,000,000 from an insurance company
Expert Solution
Computation of Maximum Change in the Money Supply:
a) Additional Excess Reserve = $1,000,000
Maximum Change in the Money Supply = Additional Excess Reserve/Reserve Requirement
= $1,000,000/10%
Maximum Change in the Money Supply = $10,000,000
b) Additional Excess Reserve Created = Cash in Checking Account*(1-Reserve Requirement)
= $1,000,000*(1-10%)
= $900,000
Maximum Change in the Money Supply = Additional Excess Reserve/Reserve Requirement
= $900,000/10%
Maximum Change in the Money Supply = $9,000,000
c) Since IBM has borrowed from an insurance company and not a bank there will be no change in the money supply.
So, maximum change in the money supply is 0.
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