Question

Suppose that in a given month $51 million is deposited into the banking system while $55 million is withdrawn. Also suppose that the Fed has set the reserve requirement at 25 percent and that banks have no excess reserves at the beginning of the month. What is the maximum amount of new checkable-deposit money that can be created (or removed) by the banking system as a result of these deposits and withdrawals?

Answer 1

Answer and Explanation:

The computation of the maximum amount of new checkable deposit money is given below:

The Net impact represent the decrease in the reserves by

= $55 million - $51 million

= $4 million

Now the

Multiplier = 1 ÷ Reserve requirement

= 1 ÷ 25%

= 4

Now Decrease in money supply is

= $4 million × 4

= -$16 million