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 increased from 8% to 10% at the same time the Fed increases deposits,what is the maximum impact the Fed's actions can have on total deposits?

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Quizplus · Accepted Answer

If the Fed increases deposits by $50 billion, and the reserve requirement is increased from 8% to 10%, financial institutions would need to hold an additional $2 billion ($50 billion x 0.02) in reserves. As a result, the maximum impact on total deposits would be $450 billion ($50 billion divided by 0.08 minus $2 billion divided by 0.10). This is because financial institutions can create new loans based on their excess reserves and with the new reserve requirement, they would have less excess reserves to create new loans. Therefore, the maximum impact on total deposits would be limited to $450 billion.

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