Suppose the reserve requirement ratio is 10 percent.Assuming no bank holds excess reserves and nobody withdraws cash,a $100,000 reduction of excess reserves by the Fed can eventually

Question

Quizplus · Accepted Answer

A reduction of $100,000 in excess reserves by the Fed will lead to a decrease in the money supply by the reciprocal of the reserve requirement ratio, which is 1/0.10 or 10. So, the total decrease in the money supply will be 10 times $100,000 or $1 million. Therefore, the correct answer is C, which indicates a reduction in checkable deposits by $1 million.

Suppose the Reserve Requirement Ratio Is 10 Percent