If banks lend all of their excess reserves, and if all the money loaned out by b

Question

If banks lend all of their excess reserves, and if all the money loaned out by banks gets re-deposited back into the banking system: If the reserve requirement were 10%, then $100 of new reserves received by the banking system could ultimately support 1/Times $100 = $ of Checkable Deposits. If the reserve requirement were 25%, $100 of reserves could support 1/Times $100 = $ of Checkable Deposits. If the reserve requirement were100%, $100 of reserves could support 1/Times $100 = $ of Checkable Deposits.

Explanation / Answer

1) With the reserve requirements of 10%, when the bank system receives $100 new reserves, it will keep $10 (10%) as required reserves and lend all the excess reserves. This $90 will be redeposited in the banking system. So $100 can support 1/0.1*100 = $1000 of CD.

2) With the reserve requirements of 25%, when the bank system receives $100 new reserves, it will keep $25 (25%) as required reserves and lend all the excess reserves. This $75 will be redeposited in the banking system. So $100 can support 1/0.25*100 = $4000 of CD.

3) With the reserve requirements of 100%, when the bank system receives $100 new reserves, it will keep $100 (100%) as required reserves and will not lend anything. So $100 can support 1/1*100 = $100 of CD.

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.