If the federal reserve decreases the reserve rate from 5% to 2%, how does this affect the amount of money that would result because of fractional reserve banking an initial deposit into a bank of 25,000?

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Mathematics

Duncan

7 March, 07:36

If the federal reserve decreases the reserve rate from 5% to 2%, how does this affect the amount of money that would result because of fractional reserve banking an initial deposit into a bank of 25,000?

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Rigoberto · Answer 1

With a 5% reserve ratio, the Fed can create up to 1.05=20 times the initial deposit. With a 2% reserve ratio, it can create up to 1.02=50 times the initial deposit. So lowering the reserve ratio would increase the amount of money made. 50x-20x=30x, where x=$25,000.