You just received a bonus at your job of $4,000 which you decide to put in a che

Question

You just received a bonus at your job of $4,000 which you decide to put in a checking account at the local bank. Assume that banks lend out all excess reserves and there are no leaks in the banking system. That is, all money lent by banks gets deposited in the banking system. Round your answers to the nearest dollar. If the reserve requirement is 16%, how much the total value of checkable deposits in the whole banking system will increase, including your original deposit? If the reserve requirement is 6%, how much the total value of checkable deposits in the whole banking system will increase, including your original deposit? Increasing the reserve requirement the money supply.

Explanation / Answer

At 16%, 1/rr*4000 = 1/.16 * 4000 = 25000

At 6%, 1/rr*4000 = 1/.6 * 4000 = 66666.67

Increase in reserve requirement decreases the money supply in the economy.

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