Chapter 15, Problem 12AA

To determine

To evaluate: The affect in money supply if in a 10 percent fractional reserve banking system, the Fed injects $100 of new money into the American economy.

Explanation of Solution

The effect of this infusion of currency would be that there will be multiple expansion of the money supply.

When the Federal Reserve raises reserves, producing an equivalent amount of deposits, a single bank may make loans up to the excess assets that it has. But a multiple deposit expansion can be created via the banking system. When each bank makes and invests a deposit, it ends up losing reserves to other banks that use them to increase their loans, making new deposits before all the excess reserves have been used up.

Economics Concept Introduction

Introduction: Economists examine the money supply and create policies that revolve around it by regulating interest rates and rising or reducing the amount of money that flows through the economy. Analysis of the public and private sectors is carried out due to the possible impacts of the money supply on price level, inflation and the business cycle.