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Unformatted text preview: 6. If you take $100 that you held as currency and put it into the banking system, then the total amount of deposits in the banking system increases by $1,000, because a reserve ratio of 10% means the money multiplier is 1/.10 = 10. Thus, the money supply increases by $900, because deposits increase by $1,000 but currency declines by $100. 7. With a required reserve ratio of 10%, the money multiplier could be as high as 1/.10 = 10, if banks hold no excess reserves and people do not keep some additional currency. So the maximum increase in the money supply from a $10 million open-market purchase is $100 million. The smallest possible increase is $10 million if all of the money is held by banks as excess reserves. 8. a. If the required reserve ratio is 5%, then First National Bank's required reserves are $500,000 x .05 = $25,000. Because the bank’s total reserves are $100,000, it has excess$500,000 x ....
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This note was uploaded on 02/13/2012 for the course ECO 202 taught by Professor Normmiller during the Spring '08 term at Miami University.
- Spring '08