Question

The Federal Reserve carries out open-market operations, buying $2 million worth of Treasury Bills from banks. This action increased the money supply by $3 million. Assuming that the currency-deposit ratio for the U.S. economy is 1.20, determine what percent of deposits the banks hold as reserves.

Answer 1

67%

Step-by-step explanation:

Money supply = Money multiplier * Deposit worth

3 = Money multiplier * 2

Money multiplier = 3/2

Money multiplier = 1.5

Now, Money multiplier = 1 / Reserve ratio

1.5 = 1 / Reserve ratio

Reserve ratio = 1/1.5

Reserve ratio = 0.6667

Reserve ratio = 67%

So, the percent of deposits the banks hold as reserves is 67%