Question

Suppose the economy's entire money supply equals checkable deposits in the amount of $ 1,500,000 held in First Main Street Bank. The required reserve ratio is 5 % with no excess reserves

Answer 1

The question involves monetary policy, specifically the role of reserve requirements set by the Federal Reserve and their effect on the money supply. Reserve requirements were reduced to 0% in March 2020 to stimulate lending and liquidity during the pandemic-induced recession.

Step-by-step explanation:

The question is regarding monetary policy and the impact of reserve requirements on the money supply, which is a topic typically covered in college-level business, economics, or finance courses. It aims to explore how reserve ratios set by the Federal Reserve influence the banking system's ability to create money through loans and deposits. As of March 2020, due to the economic impact of the COVID-19 pandemic, the Federal Reserve reduced reserve requirements to 0%, eliminating them for depository institutions.

This was a significant change in monetary policy to encourage lending and increase liquidity in the economy. Prior to this change, banks were required to hold a fraction of their deposits as reserves, with the percentage varying based on the total deposit amount.