Assuming a required reserve ratio of 10% and the Fed purchased $1 million worth of mortgage-backed securities,make use of the simple deposit multiplier to determine by how much checking deposits would change.

Question

Quizplus · Accepted Answer

The simple deposit multiplier formula is: 
1/required reserve ratio
In this case, the required reserve ratio is 10%, so the simple deposit multiplier would be:
1/0.10 = 10
This means that every dollar the Fed purchases in mortgage-backed securities can potentially create $10 in new checking deposits within the banking system.

Thus, if the Fed purchased $1 million of mortgage-backed securities, the potential increase in checking deposits would be:
$1 million x 10 = $10 million.

Therefore, the correct answer is B) increase by $10 million.

Assuming a Required Reserve Ratio of 10% and the Fed