Question: Although the U.S. Federal Reserve doesn't use changes in reserve requirements to manage the money supply, the central bank of Albernia does. The commercial banks of Albernia have $100 million in reserves and $1,000 million in checkable deposits; the initial required reserve ratio is 10%. The commercial banks follow a policy of holding no excess reserves. The public holds no currency, only checkable deposits in the banking system.
a. How will the money supply change if the required reserve ratio falls to 5%?
b. How will the money supply change if the required reserve ratio rises to 25%?