In the simple deposit expansion model,if the required reserve ratio is 20 percent and the Fed increases reserves by $100,checkable deposits can potentially expand by

Question

Quizplus · Accepted Answer

The simple deposit expansion model is given as
1/RR x ∆R = ∆D
where RR is the required reserve ratio, ∆R is the change in reserve and ∆D is the change in checkable deposits.

Using the above formula, we get:
1/0.20 x 100 = ∆D
∆D = 500

Hence, the potential expansion of checkable deposits is $500. Answer C is correct.

In the Simple Deposit Expansion Model,if the Required Reserve Ratio