Suppose the reserve requirement on transaction deposits is set by the Federal Reserve System at 15 percent and the banking system presently holds $25 million in excess reserves. Assuming all payments are made in the economy by drafts (checks) against transaction deposits, there are no leakages of funds into thrift deposits or additional excess reserves, all funds received are immediately loaned out by depository institutions as soon as they are received, what is the maximum volume of new deposits and loans that can be created by the banking system (rounded to the nearest million dollars)?

Question

Quizplus · Accepted Answer

The maximum volume of new deposits and loans that can be created by the banking system is $167 million. This is calculated by dividing the excess reserves by the reserve requirement. In this case, the excess reserves are $25 million and the reserve requirement is 15%, so the maximum volume of new deposits and loans that can be created is $25 million / 0.15 = $167 million.

Suppose the Reserve Requirement on Transaction Deposits Is Set by the Federal