The Federal Reserve specifies a percentage of checkable deposits that banks hold must hold as reserves (required reserves), which is called the required reserve ratio. Excess reserves are reserves that banks hold over and above the required reserves and can make loans. Suppose that Bank A has an increase in checkable deposits of $100 million and the required reserve is 10%. How much money can Bank A create by making loans? How much money can the banking system as a whole create? Show your detailed calculation. What can you say about the relationship between the required reserve ratio and money creation? Why do some banks hold a part in excess reserves instead of loaning all excess reserves out? What are some other ways that banks may use a portion of their excess reserves?
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Hubbard, R. G., & O’Brien, A. P. (2017). Money, banking, and the financial system (3rd ed.). Retrieved from https://www.vitalsource.com
Chapter 13: The Federal Reserve and Central Banking
Chapter 14: The Federal Reserve’s Balance Sheet and the Money Supply Process
Chapter 15: Monetary Policy
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