Suppose the Fed's required reserve ratio (REQ) is 10%. Further suppose that the Fed buys $25 million of U.S. Treasury securities from a dealer who deposits the check, which is drawn on the Fed, in her bank increasing her bank's reserve account (∆R) with the Fed by $25 million as well as its demand deposits, its total reserves, and the overall level of M₁. The total demand deposits created (∆TDD) are $25 million.

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The total demand deposits created (∆TDD) would be greater than $25 million due to the money multiplier effect. With a required reserve ratio (REQ) of 10%, the maximum potential increase in total demand deposits can be calculated using the money multiplier formula (1/REQ), which in this case is 1/0.10 = 10. Thus, the total potential increase in demand deposits could be up to $250 million ($25 million * 10), not just $25 million.

Suppose the Fed's Required Reserve Ratio (REQ) Is 10