In the simple deposit expansion model,if the Fed purchases $100 worth of bonds from a bank that previously had no excess reserves,deposits in the banking system can potentially increase by

Question

Quizplus · Accepted Answer

According to the simple deposit expansion model, the potential increase in deposits is calculated by multiplying the initial injection of funds by the reciprocal of the required reserve ratio. In this case, the initial injection is $100 and let's assume the required reserve ratio is 10% (0.10), then the potential increase in deposits would be 100/0.10 = $1000. Therefore, the correct answer is C.

In the Simple Deposit Expansion Model,if the Fed Purchases $100