Question

Assume the Fed is trying to decide whether to lower the required reserve ratio to 7%. Currently, the required reserve ratio is 10%. If banks keep no excess reserves, how much more would the money supply increase if the Fed lowers the reserve ratio when someone deposits $500 into a checking account?

Answer 1

$465

Step-by-step explanation:

If the banks hold no excess reserves, and the Fed establishes a required reserve ratio of 7%, it means that after the $500 deposit is made, the bank has to keep 7% as reserves, which is money that cannot be loaned out, and loan out the rest, increasing the money supply by that quantity.

500 * 7% = 35

$35 are kept in reserve, while the remaining $465 can be loaned out. This is the amount that increases the money supply.