Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash. An open market purchase of $1million by the Fed will see banking system deposits increase by:
A. More than $1 million but less than $10 million.
B. Exactly $1 million.
C. Less than $1 million.
D. More than $10 million but less than $20 million.
Answer:A
Assume that the required reserve rate is ten percent, banks want to hold excess reserves in an amount that equals three percent of deposits, and the public withdraws ten percent of every deposit in cash. An open market purchase of $1million by the Fed will see banking system deposits increase by:
A. More than $1 million but less than $10 million. B. Exactly $1 million. C. Less than $1 million. D. More than $10 million but less than $20 million.