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The RRR is 20%. Total demand deposits in the economy equal $2 billion. Banks in the economy are fully lent up (i.e., are holding no excess reserves). The Fed then lowers the RRR to 10%. As a result, the money supply, assuming that banks continue to be fully lent up and that there are no cash leaks, shall __________________ . (Hint: First calculate bank's cash reserves as 20% of $2 billion

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ogorwyne

This tells us that if there are no cash leaks there would be a rise by 2 billion dollars in the money supply.

The total demand deposit = 2 billion dollars

The RRR is said to be = 20%

This is now = 10%.

20% of 2billion =

[tex]\frac{20}{100} *2000000000\\\\= 400million[/tex]

10% of 2billion = 200 million.

The excess = 400m - 200m

= 200m

The money = 200*1/0.10

= 2 billion dollars.

10% is kept while 90% is lent out compared to before when 20% was kept and 80% lent out.

Former multiplier = 1/0.20 = 5

Multiplier now = 1/0.10 = 10.

This tells us that if there are no cash leaks there would be a rise by 2 billion dollars in the money supply.

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