If the Fed purchases $1 million worth of securities and the required reserve ratio is 8%,by how much will deposits change (assuming no change in excess reserves or the public's currency holdings)?

Question

Quizplus · Accepted Answer

The required reserve ratio is 8%, therefore the initial deposit of $1 million would require 0.08 x $1 million = $80,000 in reserves. When the Fed purchases $1 million worth of securities, banks receive an increase in reserves of $1 million x 0.08 = $80,000. Since the increase in reserves equals the required reserves, banks have excess reserves of $1 million - $80,000 = $920,000. This means that banks can create new loans and deposits of up to $920,000. Using the money multiplier formula, we can calculate the total increase in deposits as follows: 
(1 / required reserve ratio) x change in reserves = (1 / 0.08) x $80,000 = $1 million. Therefore, deposits will rise by $1 million, and the correct answer is D.

If the Fed Purchases $1 Million Worth of Securities and the Required