Question

If the federal reserve decreases the reserve rate from 7% to 5%, how does this affect the amount of money that would result because of fractional-reserve banking from an initial deposit into a bank of $30,000?

Answer 1

If the federal reserve rate is 7% the money supply would be
30,000÷0.07=428,571
If the federal reserve rate is 5% the money supply would be
30,000÷0.05=600,000
The affect
600,000−428,571=171,429
Increase by 171429

Answer 2

The total affect of the decrease in the interest rate = $29400

Explanation:

The initial amount of money which has been deposited into the account = $30000

The rate at which the initial money was deposited = 7%

But it is given that the federal reserve decreases the reserve rate from 7% to 5%

Now, we need to find the affect of this decrease on the deposited money

The rate of change in the interest rate = 7 - 5 = 2%

So, The affect of this decrease = 2% of 30000

= $600

So, The money becomes = 30000 - 600

Therefore, The total affect of the decrease in the interest rate = $29400