Suppose the banking system as a whole has 600 billion in deposits ...

[skymedlock]

Suppose the banking system as a whole has 600 billion in deposits and 66 billion in reserves, with a reserve ratio of 11 percent. What happens to the stock of money if the Fed lowers reserve requirements by changing the reserve ratio to 10 percent?

Question 2

Traditional Keynesians would argue that fluctuations in aggregate demand are closely tied to fluctuations in investment.
 a. True
  b. False
  Indicate whether the statement is true or false

[braelync]

Answer to Question 1

Under the revised reserve requirements, banks are required to keep only 60 billion in reserves (600 billion  0.10), giving them 6 billion (66 billion -  60 billion) in excess reserves. Considering a money multiplier of 10, the move would permit an expansion in deposits of 60 billion, which represents a 10 percent increase in the stock of money, from 600 to 660 billion.

Answer to Question 2

True

[skymedlock]

Excellent

[momolu]

TYSM