If the required reserve rate is ten percent and banks do not hold any excess reserves and there are no changes in currency holdings, a $1 million open market purchased by the Fed will result in deposit creation of:

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Quizplus · Accepted Answer

The required reserve rate is ten percent, so for every $1 million purchased by the Fed, banks can lend out $900,000 (keeping $100,000 as required reserves). This $900,000 can then be deposited into other banks, who can lend out $810,000 ($90,000 as required reserves), and so on. Using the multiplier formula (1/required reserve ratio), we can calculate that the total deposit creation will be $10 million (($1 million / 0.1) x multiplier = $10 million).

If the Required Reserve Rate Is Ten Percent and Banks