Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its open market operations.If the reserve requirement for all deposits is 8%,what is the maximum impact the Fed's actions can have on total deposits?
A) $575 billion increase
B) $54.3 billion increase
C) $625 billion increase
D) An increase greater than $1 trillion
E) Total deposits would decrease,but there is not enough information to compute the amount.

Question

Quizplus · Accepted Answer

The maximum impact the Fed's actions can have on total deposits is $575 billion increase. This is because the Fed's increase in deposits at financial institutions by $50 billion will lead to an increase in excess reserves. These excess reserves can then be used by financial institutions to make new loans and investments, which will lead to an increase in the money supply. The maximum possible increase in the money supply is equal to the amount of excess reserves multiplied by the money multiplier. In this case, the money multiplier is 1/(reserve requirement) = 1/0.08 = 12.5. Therefore, the maximum possible increase in the money supply is $50 billion x 12.5 = $575 billion.

Suppose the Federal Reserve Increases Deposits at Financial Institutions by $50