CHAPTER 27 THE MONETARY SYSTEM 625 c. Explain what effect BSB’s action will have on other banks. d. Why might it be difficult for BSB to take the action described in part (b)? Discuss another way for BSB to return to its original reserve ratio. 7. You take $100 you had kept under your pillow and deposit it in your bank account. If this $100 stays in the banking system as reserves and if banks hold reserves equal to 10 percent of deposits, by how much does the total amount of deposits in the banking system increase? By how much does the money supply increase? 8. The Federal Reserve conducts a $10 million open-market purchase of government bonds. If the required reserve ratio is 10 percent, what is the largest possible increase in the money supply that could result? Explain. What is the smallest possible increase? Explain. 9. Suppose that the T-account for First National Bank is as follows: A SSETS L IABILITIES Reserves $100,000 Deposits $500,000 Loans 400,000 a. If the Fed requires banks to hold 5 percent of
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