Question

If the Federal Reserve decreases the reserve rate from 4% to 2%, how does this affect the amount of money that would result because of fractional-reserve banking from an initial deposit into a bank of $55,000?

Answer 1

Hi there

If the Federal Reserve decides to lower the reserve ratio through an expansionary monetary policy, commercial banks are required to hold less cash on hand and are able to increase the amount of loans to give consumers and businesses. This increases the money supply, economic growth and the rate of inflation.

Amount to be loan out at 4% reserve
55,000÷0.04=1,375,000

Amount to be loan out at 2% reserve
55,000÷0.02=2,750,000

It increase by
2,750,000−1,375,000
=1,375,000. ..answer

Hope it helps