Suppose the required reserve ratio is 20% and the banking system initially has $10 billion in...
Suppose the required reserve ratio is 20% and the banking system initially has $10 billion in excess reserves. If $20 billion in new deposits are deposited into the system:
a) What is the new total level of Excess Reserves after the deposit in the banking system?
b) What is the maximum total expansion in deposit creation be over time after this deposit?
Homework Answers
Solution:-
a) New excess reserves created = 20 billion - (0.2*20000000000)
= 20 billion - 4 billion
= 16 billion
Total level of Excess Reserves after the deposit = 10 billion + 16 billion = 26 billion
b) Maximum total expansion in deposit creation = (1/0.2)*26 billion = 130 billion
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