If banks face a reserve requirement of 10%,then when the Fed increases bank reserves by $20 million,the money supply can be estimated to increase by about

Question

Quizplus · Accepted Answer

The reserve requirement of 10% means that banks can lend out 90% of the new reserves they receive from the Fed. Therefore, when the Fed increases bank reserves by $20 million, banks can lend out $18 million ($20 million x 0.9). This $18 million is then deposited into other banks, who can lend out 90% of their new deposits, and so on. Using the money multiplier formula (1/reserve ratio), we can estimate the increase in the money supply as follows:
1/0.1 = 10
10 x $18 million = $180 million
However, this only reflects the initial increase in bank reserves. As the new money is deposited and lent out, it can continue to increase the money supply through multiple rounds of lending. Taking these rounds into account, the final increase in the money supply could be around $200 million.

If Banks Face a Reserve Requirement of 10%,then When the Fed