Question

If the federal reserve decreases the reserve rate from 10% to 80% how does this affect the amount of money that would result because a fractional reserve banking from an initial deposit into a bank of $40,000

Answer 1

100,000

Explanation:

Given :

Initial deposit = 40000

Amount of money = Initial deposit / Reserve rate

When reserve rate = 10% = 0.1

Amount of money = 40000 / 0.1 = 400,000

When reserve rate = 8% = 0.08

Amount of money = 40000 / 0.08 = 500,000

Difference = 500,000 - 400,000 = 100,000

Amount of money will increase by 100,000