16) If reserves in the banking system increase by $100, then checkable deposits

Question

16) If reserves in the banking system increase by $100, then checkable deposits will increase by $500 in the simple model of deposit creation when the required reserve ratio is

A) 0.05. B) 0.01. C) 0.10. D) 0.20

17) A simple deposit multiplier equal to one implies a required reserve ratio equal to
A) 100 percent. B) 50 percent. C) 25 percent. D) 0 percent.

18) In the simple deposit expansion model, an expansion in checkable deposits of $1,000 when the required reserve ratio is equal to 20 percent implies that the Fed

A) sold $500 in government bonds. B) purchased $500 in government bonds. C) sold $200 in government bonds. D) purchased $200 in government bonds.

Explanation / Answer

(16) (D)

Money Multiplier (MM) = Increase in checkable deposit / Increase in reserves = $500 / $100 = 5

Required reserves ratio = 1 / MM = 1 / 5 = 0.20

(17) (A)

Required reserves ratio = 1 / MM = 1 / 1 = 1 = 100%

(18) (D)

Money Multiplier (MM) = 1 / Required reserves ratio = 1 / 0.2 = 5

When checkable deposits increase by $1,000, required purchase of bonds by Fed = $1,000 / 5 = $200

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