The reserve ratio is 10 percent. A check for $1 million is deposited in Bank A, written on an account from Bank B. After the check clears what are the new excess reserves at Bank A, and by how much does the money supply change if all banks make loans so that they have zero excess reserves?

Question

Quizplus · Accepted Answer

After the check clears, Bank A receives a deposit of $1 million, but it must hold 10 percent in reserves, which is $100,000. The remaining $900,000 becomes excess reserves. If all banks make loans so that they have zero excess reserves, Bank A will loan out the full $900,000, leading to an increase in the money supply of $900,000. Therefore, the new excess reserves at Bank A will be $900,000, and the money supply will increase by $900,000.

The Reserve Ratio Is 10 Percent