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What happens when there are no excess reserves?Excess reserves plus required reserves equal total reserves. Because banks earn relatively little interest on their reserves held on deposit with the Federal Reserve, we shall assume that they seek to hold no excess reserves. When a bank's excess reserves equal zero, it is loaned up.
What happens when banks decide to hold more excess reserves?If banks decide to hold more excess reserves and make fewer loans, the amount of money supply will be smaller.
How do you calculate required reserves and excess reserves?Total Reserves = Cash in vault + Deposits at Fed.. Required Reserves = RR x Liabilities.. Excess Reserves = Total Reserves - Required Reserves.. Change in Money Supply = initial Excess Reserves x Money Multiplier.. Money Multiplier = 1 / RR.. How much must the bank keep on hand if the required reserve is 10% and there is a deposit of $100?If the reserve requirement is 10%, the deposit multiplier means that banks must keep 10% of all deposits in reserve, but they can create money and stimulate economic activity by lending out the other 90%. So, if someone deposits $100, the bank must keep $10 in reserve but can lend out $90.
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