Suppose checking deposits increase by $6,000 after all rounds of the money-creation process when the Fed buys $1,200 worth of U.S. government securities. This implies that the maximum value of the required reserve ratio would be _____

Question

Quizplus · Accepted Answer

The required reserve ratio (RRR) is the ratio of required reserves to checking deposits. When the Fed buys $1,200 worth of government securities, it injects $1,200 of new reserves into the banking system. The money-creation process then occurs, which in this case results in $6,000 of new checking deposits. We can use the money multiplier formula to calculate the maximum value of the RRR:

Money multiplier = 1 / RRR

$6,000 = (1 / RRR) x $1,200

RRR = 0.2

Therefore, the maximum value of the required reserve ratio would be 0.2, or choice letter C.

Suppose Checking Deposits Increase by $6,000 After All Rounds of the Money-Creation