If checking deposits increase by $6,000 after all rounds of the money-creation process when the Fed buys $1,200 worth of U.S.government securities,the maximum value of the required reserve ratio is

Question

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The required reserve ratio is the fraction of deposits that banks are required to hold in reserve. To find the required reserve ratio, we can use the money multiplier formula:

Money multiplier = 1 / reserve requirement

We know that checking deposits increased by $6,000, which means that the money supply increased by the same amount. We also know that the Fed bought $1,200 worth of U.S. government securities, which injected new reserves into the banking system. We can use the following formula to calculate the maximum potential increase in the money supply:

Maximum potential increase in money supply = (1 / reserve requirement) x increase in reserves

In this case, the increase in reserves is $1,200 and the increase in money supply is $6,000, so we can write:

6,000 = (1 / reserve requirement) x 1,200

Simplifying this equation, we get:

reserve requirement = 0.2

Therefore, the maximum value of the required reserve ratio is 0.2, or 20%. The correct answer is C.

If Checking Deposits Increase by $6,000 After All Rounds of the Money-Creation