Exhibit 13-1 Bank Increase in Checkable Deposits Reserves New Required New Check

Question

Exhibit 13-1 Bank Increase in Checkable Deposits Reserves New Required New Checkable Deposits Created by Extending New Loans $0 $1,000 $0 $1,000 $90 $810 Assume that the required reserve ratio is 10%, that there are no cash leakages, and that banks hold zero excess reserves. Refer to Exhibit 13-1. Suppose that the Federal Reserve conducts open market operations by purchasing $1,000 worth of govemment securities from Bank A. At the end of this process of money creation, what equation would be used to determine the total amount of new checkable deposits?

Explanation / Answer

Option E.

1 / Required Reserve Ratio * Change in reserves resulting from initial injection of funds.

1 / r represents the money multiplier.

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