Suppose the banking system has vault cash of $1,000, deposits at the Fed of $2,000, and demand deposits of $10,000. A.
If the reserve requirement is 20 percent, what is the maximum potential increase in the money supply, given the banks’ reserve position?
b. If the Fed now purchases $100 worth of govern- ment bonds from private bond dealers, what are the excess reserves of the banking system? (Assume that the bond dealers deposit the $100 in demand deposits.) How much can the bank- ing system increase the money supply, given the new reserve position?