1. Deposits in all financial institutions equal $2 trillion. The total reserves held by these institutions are $240 billion, $100 billion of which is in excess of reserve requirements.
a. What is the percentage reserve requirement?
b. What would the percentage reserve requirement have to be to maintain the existing amount of reserves ($240 billion) but eliminate excess reserves?
c. What would happen to deposits at all financial institutions if the existing excess reserves were eliminated? Assume that elimination of excess reserves affects deposits only.
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c. Excess reserves of $100 billion will be loaned to create additional deposits:
Max. change in money supply (deposits) = Excess Reserves / Reserve requirement
= $100 billion / .07 = $1.43 billion