1. Suppose that banks have decided they need to keep a reserve ratio of 25 percent—this ensures that they’ll have enough cash in the tellers’ drawers and ATMs to keep depositors happy, and enough electronic deposits at the Federal Reserve so that they can redeem checks presented by other banks.
a. What is the money multiplier (technically, the deposit expansion multiplier) in this case?
b. If depositors start visiting the ATM a lot more often, will banks want to have a higher reserve ratio or a lower reserve ratio? Will this increase the money multiplier or lower it?
c. Some economists have recommended that all banks be required by law to keep 100 percent of their deposits in the bank vault, at the Federal Reserve, or invested in ultra-safe securities such as short-term U.S. Treasury bills. If this were the case, what would the money multiplier be? What would happen to interest rates on bank deposits? What happens to the interest rate on bank loans?