Question

What happens to checkable deposits in the banking system when the Fed lends an additional​ $1 million to the First National​ Bank, assuming that the required reserve ratio on checkable deposits is​ 10%, banks do not hold any excess​ reserves, and the​ public's holdings of currency do not​ change? A. Checkable deposits rise by​ $1 million. B. Checkable deposits rise by​ $10 million. C. Checkable deposits rise by​ $100,000. D. Checkable deposits rise by​ $900,000.

Answer 1

The correct answer is option B.

Step-by-step explanation:

The Fed lends $1 to the First National Bank.

The required reserve ratio is 10%.

There are no excess reserves with the bank.

This additional amount will cause an increase in the check-able deposits.

Change in check-able deposits

=
`(1)/(required\ reserve)\ *\ change\ in\ reserves`

=
`(1)/(0.1)\ *\ 1`

= $10 million