Question

Suppose the Federal Reserve increases deposits at financial institutions by $50 billion through its
open market operations. If the reserve requirements for all deposits is 8%, what is the maximum impact the Fed's actions can have on total deposits?

a. $54.3
billion increase
b. An
increase greater than $1 trillion
c. $625
billion increase
d. $575
billion increase
e. Total
deposits would decrease, but there is not enough information to compute the amount.

Answer 1

50(.92) gets put into circulation; or rather, can theoretically be used as checkable deposits.

.92 of those checkable deposits can be used for loans/returned as checkable deposits ... over and over... right?

Answer 2

if I recall correctly; the effect is initial 50 multipled 1/(r).

Answer 3

in increase of 625 billion ?

Answer 4

yes, i too think so.